For better or worse, marijuana is the most popular investment opportunity right now, with the industry slated to see sales grow between fourfold and sixfold by 2030. Among the dozens upon dozens of pot stocks for investors to choose from, it's Aurora Cannabis (NYSE: ACB) that clocks in as the favorite.
According to Markets Insider, Aurora Cannabis wound up passing perennial tech favorite Apple on free trading app Robinhood in terms of share ownership. With Robinhood being an app primarily favored by millennials, and the younger generation supporting the cannabis movement and legalization more so than seniors, it's pretty safe to call Aurora the favorite among all marijuana stocks.
Here's why Aurora is the true "apple" of investors' eyes
This "favorite" brings a number of factors to the table that investors have flocked to. Chief among them is the expectation that the company will outproduce all of its peers. Aurora's recently updated outlook for Aurora Sun, its largest organically constructed grow farm, now puts the company on track for an annual run rate of 625,000 kilos by mid-2020, with aggregate output expected to eventually top 660,000 kilos, per company estimates. I'd expect this annual production to eventually push past 700,000 kilos as its South American cultivation facilities are further developed.
In addition to sheer volume, Aurora Cannabis is also producing weed at an above-average yield. Aurora Sun, for instance, will yield more than 140 grams per square foot, or over 40% above the industry average. When combined with the benefits of economies of scale, Aurora Cannabis should offer one of the lowest per-gram growing costs for dried flower in the industry.
Aurora also looks to be a leader in the international market. With more than 40 countries giving the green light to medical marijuana, Aurora is leading the field by having production or distribution deals with 24 of them (including Canada). These overseas markets could come in handy if and when dried flower ever becomes oversupplied in Canada by providing the company with a means to offload its excess supply without crushing its margins.
Aurora's glaring flaw: It lacks a brand-name partner
But if there's one thing Aurora Cannabis doesn't have, it's a brand-name partner. Whereas Canopy Growth, Cronos Group, and Tilray have all secured brand-name deals or investments, Aurora has been the odd bud out.
In an effort to rectify this, in March the company hired billionaire activist investor Nelson Peltz, the founder of Trian Fund Management, to become a strategic advisor. Peltz has extensive knowledge in the food and beverage industry, which would make him the perfect conduit to negotiate a potential partnership with a global food or beverage company.
As a reminder, Health Canada expects to give new consumption options the green light by this coming October, including edibles and nonalcoholic cannabis-infused beverages. These beverages are viewed as a means to attract new consumers who might otherwise not care for the "high" that consuming dried flower and other tetrahydrocannabinol (THC)-containing products might bring.
This push toward cannabis derivatives also speaks to a massive market opportunity for cannabidiol (CBD), the nonpsychoactive cannabinoid that's best known for its perceived medical benefits. Global sales of CBD-based products, including beverages, are expected to soar from $591 million in 2018 to $22 billion by 2022.
No beverage partner? No big deal!
Just how much of a problem is it that Aurora Cannabis hasn't landed a partner as of yet? According to Bank of America covering analyst Christopher Carey, who rates Aurora as a buy, the company's strategy to focus on vapes and edibles, while not yet diving into beverages, could cause it to "miss the boat." Said Carey in a note following the company's fiscal third-quarter earnings:
We see the strategy as reasonable; however, with so many companies also focused on these areas, and very few with the scale or capabilities to build advantages in untapped areas like beverages (with the exception of Canopy and HEXO), we wonder if Aurora could be "missing the boat" on an area which could prove large as newer consumers wanting less pervasive, socially accepted product forms demand both psychoactive (THC-infused) and CBD beverages.
But I'm not convinced that Aurora is really losing a lot of ground on the beverage front by taking its time to find the right partner. Competition in the space is likely to be fierce, with Canopy Growth partnered with Constellation Brands, HEXO tied up with Molson Coors Brewing, Tilray in a joint venture with Anheuser-Busch InBev, The Green Organic Dutchman setting aside production space for beverages, and Heineken producing its own infused beverages in select California stores, to name a few companies involved. It's unclear if any of these partnerships will be generating enough in sales to really move the needle. As such, Aurora slow-stepping its possible entrance into nonalcoholic beverages probably isn't an issue.
No investment partner? Now that's a big deal
However, Aurora taking its sweet time finding a partner is a big deal from the standpoint of the company having to continually issue shares of its common stock to raise capital.
Canopy Growth and Cronos Group were lucky enough to land respective equity investments of $4 billion from Constellation Brands and $1.8 billion from Altria, giving both companies more than enough cash to execute their long-term growth strategies. Even the joint ventures between HEXO and Molson, and Tilray and AB InBev have involved some form of cost-splitting, thereby removing some of the financial burden from these aforementioned pot stocks.
When it comes to acquisition-hungry Aurora Cannabis, which has gobbled up 15 businesses since August 2016, nearly every buyout has been financed entirely with its stock. As a result, Aurora Cannabis' outstanding share count has ballooned by 1 billion shares in less than five years. This continues to destroy shareholder value, even as Aurora's market cap rises. Landing an investment partner would provide a much-needed cash infusion that finally wouldn't come at the detriment of existing shareholders.
What's more, Aurora could probably use a helping hand developing its brands. Acquiring the well-known Whistler Medical Marijuana will help it establish a strong presence on Canada's West Coast, but the marketing prowess of a brand-name partner is needed to really boost Aurora's brand-building initiatives domestically and overseas.
Make no mistake about it, Aurora needs a partner, but probably not for the reason(s) you've been led to believe.
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Sean Williams owns shares of Bank of America. The Motley Fool owns shares of and recommends Apple. The Motley Fool owns shares of Molson Coors Brewing and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Anheuser-Busch InBev NV, Constellation Brands, and HEXO. The Motley Fool has a disclosure policy.
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