Though all eyes have been on the fast-growing tech sector for much of 2020, don’t overlook the sleeping giant in North America: Cannabis.

After turning in just shy of $11 billion in global sales in 2018, Wall Street estimates suggest that worldwide legal weed revenue could hit $50 billion to $200 billion a decade from now. This wide range is reflective of growing support and legalizations for marijuana worldwide, as well as the fact that we just don’t know the market value of what’s being conducted behind the scenes every year.

What is a near-certainty is that North America will be the hotbed of this marijuana growth. That’s why Alberta-based Aurora Cannabis (NYSE:ACB) quickly rose the ranks to become the most popular marijuana stock.

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This isn’t what long-term investors signed up for

At roughly the midpoint of 2019, investors were of the impression that Aurora Cannabis was going to be a runaway leader in the pot industry. It had 15 cultivation facilities that, if fully operational, would have little trouble surpassing 650,000 kilos in annual output. The company also had access to roughly two dozen countries outside of its home market of Canada, and had recently brought billionaire activist investor Nelson Peltz onboard as a strategic advisor. Following Canopy Growth and Cronos Group landing billion-dollar equity investments, Peltz was expected to be the liaison that would help Aurora snag a brand-name partner.

What could go wrong? Apparently everything.

Aurora Cannabis has since permanently closed five of its smallest production facilities, sold the 1-million-square-foot Exeter facility, which was never retrofit for cannabis growing, and halted construction on two its largest projects (Aurora Sun in Alberta and Aurora Nordic 2 in Denmark). The company’s peak output has been reduced by more than 400,000 kilos a year.

Meanwhile, Aurora Cannabis’ international revenue has stagnated at less than $5 million Canadian per quarter, and Nelson Peltz recently announced his resignation as senior advisor. None of the selling points that investors believed they were getting when they first bought into Aurora Cannabis hold water anymore.

That begs the question: Will Aurora Cannabis ever be worth buying?

A magnifying glass held over a company's balance sheet.

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Aurora Cannabis is finally facing some of its demons

Although I’ve been an Aurora bear for a verylongtime… I’m also encouraged by the company finally coming to terms with its evident shortcomings. Aside from closing smaller facilities with higher growing costs and reducing output to better align with prevailing market conditions in Canada, the company finally addressed its ugly balance sheet in the fiscal fourth quarter (ended in June).

As announced by the company last month, it took a fixed asset impairment charge of CA$86.5 million tied to the closure of its smaller production facilities, and adjusted the value of its inventory via a CA$135.1 million charge. More importantly, Aurora took a massive CA$1.6 billion writedown of goodwill and intangible assets to reflect that it grossly overpaid for its many acquisitions — especially the MedReleaf deal

Is Aurora Cannabis’ balance sheet perfect? Not at all. But after writing down close to CA$3 billion in value during fiscal 2020, investors have more realistic figures to wrap their hands around.

Likewise, the company’s backpedaling on costs in an effort to reduce cash burn is commendable and was sorely needed. Management expects positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) by the fiscal second quarter of 2021 (the quarter ended Dec. 31), albeit the goalposts have been moved a couple of times before with this figure.

A person holding up a white puzzle piece with a question mark drawn on it.

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One day, Aurora may be worth buying — but not anytime soon

But the question, again, is, will Aurora ever be worth buying?

I believe the answer is that it can be, but there’s still a multiyear transformation that needs to take place before that can happen.

For example, one of the biggest drawbacks of owning Aurora Cannabis stock is that management has continually pummeled its shareholders with common stock issuances for the past few years. Aurora has used its common stock as collateral to fund every single acquisition since Aug. 2016. It’s also issued stock via at-the-market offerings to raise capital and ensure the lights stay on. As a result, Aurora’s outstanding share count has skyrocketed from 1.3 million in June 2014 to 115.2 million shares, as of June 2020. Mind you, these figures take into account the 1-for-12 reverse split enacted this past May that kept Aurora Cannabis from being delisted from the New York Stock Exchange.

Until there are clearly defined sources of capital or positive cash flow, Aurora isn’t going to be worthy of your hard-earned money.

Additionally, this is a company that’s really geared to succeed in international markets. Canada’s relatively small population will constrain what the market is ultimately capable of in terms of annual sales. This means Aurora must be successful landing medical marijuana supply deals in overseas markets for investors to have any confidence in the company. That’s not going to happen overnight.

Also, don’t forget that longtime CEO Terry Booth stepped down earlier this calendar year, and now Nelson Peltz has resigned. Most folks (myself included) would view these departures as a step in the right direction given the many issues Aurora Cannabis has had. Then again, it means dealing with the unknowns of a new management team.

Aurora Cannabis could be worth buying someday, but “someday” is still probably many years off.

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