In recent weeks, Aurora Marijuana ( NYSE: ACB) stock has actually seen brand-new life. Everything started with the business launching its third-quarter 2020 results on May 14, which revealed 18%income growth from the previous period. A commitment to further enhancing its expenses likewise gave investors a factor to be enthusiastic that profitability might not be simply a pipeline dream.
Then, on May 20, the cannabis producer also revealed it was acquiring Reliva, a cannabidiol (CBD) brand name that would permit it to permeate the U.S. market. As interesting an opportunity as that may seem in the beginning glance, here’s why financiers should not put excessive stock in it.
It’s getting in an already crowded hemp market
Numerous headlines advertise Aurora’s recent acquisition as the business getting into the U.S. CBD market. All forms of CBD aren’t legal in the U.S. (federally), and Aurora can’t offer non-hemp items that include more than 0.3%of tetrahydrocannabinol (THC).
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The good news is that according to research companies BDS Analytics and Arcview Market Research study, the overall CBD market in the U.S. is still anticipated to reach $20 billion by 2024, up from just $1.9 billion in2018 And the bad news is that the rosy outlook for CBD doesn’t suggest the opportunity is going to equate into considerable development for Aurora.
That’s because Aurora will not only be completing with other U.S. companies for market share, however with Canadian pot stocks that are likewise looking to take benefit of the chances in the hemp market.
Julie Lerner, who is CEO of the PanXchange where hemp is traded, verified in January that there was much more supply than need for hemp. That’s not going to bode well for a company like Aurora, which is attempting to improve on its margins and get closer to success.
Having access to thousands of areas does not ensure development
In the news release announcing the acquisition of Reliva, there wasn’t a great deal of information on how big of a player the company is in the hemp market. Although Aurora referred to Reliva as “a leader in the sale of hemp-derived CBD products in the United States,” there wasn’t anything to quantify or justify that other than to state that its products were offered in more than 20,000 U.S. locations. According to experts, Reliva’s sales over a 12- month duration ending in February totaled $14 million in revenue.
Hemp-derived CBD company Charlotte’s Web ( OTC: CWBHF), offers its products in fewer areas, and it has far stronger sales. In the business’s first-quarter results, launched on May 14, Charlotte’s Web announced that its reach exceeded 11,000 places and that its sales for the three-month period totaled $215 million. And although it’s seen an increase in the variety of stores carrying its items, that hasn’t equated into considerable growth.
A year back, the company tape-recorded sales of $217 million when its products were in more than 6,000 areas. The increase in places over the previous year hasn’t resulted in a surge in sales for Charlotte’s Web, and Aurora investors shouldn’t make the mistake of assuming more locations mean greater revenue.
The move does not make Aurora a better buy
Aurora anticipates Reliva to help the Alberta-based pot manufacturer inch better to attaining a favorable adjusted revenues before income, taxes, devaluation, and amortization (EBITDA) figure. However, with Aurora sustaining an adjusted EBITDA loss of 50.9 million Canadian dollars in Q3, it has a long way to go to reach breakeven, with or without Reliva. The acquisition may assist play a little part in improving Aurora’s bottom line, but the business still has a great deal of work to do in improving its financials.
The only certainty, it seems, is that the offer will lead to more dilution for shareholders. The companies anticipate the offer will close in June, and it will cost Aurora as much as $45 million in shares.
The acquisition is a modest one for Aurora that will assist add to its leading line, however that’s about it; Aurora stays a risky buy, and one quarter and one acquisition isn’t going to alter that. The pot stock is still down more than 80%over the past 12 months, especially worse than the Horizons Marijuana Life Sciences ETF ( OTC: HMLSF), which has fallen by 60%.
David Jagielski has no position in any of the stocks discussed. The Motley Fool has a disclosure policy“>