Aurora. One of the biggest movers and shakers in Canada and how they are screwing up.
Article originally appeared here: https://finance.yahoo.com/news/aurora-cannabis-still-death-march-203228122.html
Aurora Cannabis (NYSE:ACB) stock has been on a terrifying roller coaster since its 2018 debut on the New York Stock Exchange. Since rocketing to a peak enterprise value of $15.7 billion, ACB has since wiped out 93% of shareholder money as profits have failed to materialize.
On Tuesday, investors received another dose of bad news when ACB announced a massive $1.4 billion write-down of old acquisitions. Shares slid 12% on the news. Yet, ACB stock remains the 11th most popular holding on Robinhood, a popular trading app, as speculators cheer Aurora’s news of its new CEO.
But investors shouldn’t hold out hope.
It’s certainly not a sound investment strategy, no matter how much you love pot. That’s because, as soon as the U.S. government federally legalizes marijuana, Aurora’s grower-centric business model will make it a slow-moving target for nimbler firms.
Here’s why Aurora Cannabis stock is on a slow death march to zero.
ACB Stock: Great Industry, Bad Business Model
Every several years, a new industry emerges that promises 1,000%-plus returns. Legalized marijuana is one of them.
And these are precisely the industries I love.
In many cases, like e-commerce and cloud computing, these industries DO deliver. Amazon (NASDAQ:AMZN) has returned 200,000% to investors since its 1997 IPO.
But a great industry doesn’t guarantee investment success. In 1999, a survey by UPenn counted no fewer than 1,100 major e-commerce companies. By 2004, that number had collapsed to just 31. You would have needed extreme luck or skill to scoop up winners from that pile of wreckage.
But while it’s often hard to pick the big winners, it’s usually easy to see the obvious losers.
Here’s one example. In 1999, Medicineonline.com launched its website Bidforsurgery.com, bringing an eBay-like bidding system for surgical procedures. Patients would submit anonymous requests for surgeries, and the cheapest doctor would get the contract. Sounds like a questionable investment?
And skeptical investors would have been right to stay away. Bidforsurgery.com closed not long after realizing no doctor would risk losing their medical licenses over rock-bottom pricing.
Today, Aurora Cannabis also finds itself on the same losing side of history. Its decision to focus on cultivating marijuana might have seemed like the obvious path into the pot industry. But its overemphasis on production over marketing has left it with a broken business model that will doom the company.
As ACB looks towards bankruptcy in the next 18-24 months, here’s what happened.
Aurora Meets the Lousy Farming Business
As attractive as marijuana growing sounds, it’s still an agriculture business.
And most farms have one thing in common: relatively uninspiring returns.
Why? Farming has high capital requirements and few barriers to entry. An American soybean farmer doesn’t just compete with his or her next-door neighbors. He’s competing against Brazilian and Chinese farmers as well. And in this highly commoditized business, return on assets from income rarely breaks 2.5% in any given year.
That’s why all major tobacco companies like Phillip Morris (NYSE:PM) and British American Tobacco (NYSE:BTI) don’t bother growing their own tobacco. Instead, they’re happy to buy tobacco on contract at just $2.98 per kilogram. Each cigarette, after all, holds only 1 gram of tobacco.
So where does big tobacco’s real riches come from? Sales, distribution and marketing (and taxes, in the government’s case). The average pack of cigarettes costs $5.51, with customers in many states happily (or sullenly) paying closer to $10.
The tobacco industry’s focus on marketing has paid off; profits at cigarette companies are staggering. Phillip Morris, Marlboros’s maker, generates a 160% return on invested capital (ROIC). That’s roughly as high as Apple’s profit margins