In the cannabis world, there are the "Big 4" pot stocks, which together control the majority of the Canadian cannabis market. Three of the Big 4 marijuana stocks have had a breakout moment over the past several months. Aurora (NYSE: ACB ) hasn't. Now, one Wall Street firm thinks ACB stock is about to have its moment … and in a big way.
Canadian cannabis giants Tilray (NASDAQ: TLRY ), Canopy (NYSE: CGC ) and Cronos (NASDAQ: CRON ) have all had edged out ACB with their own big-time moments. In fact, while the other three pot stocks are all up more than 85% over the past year, ACB stock is up just 30%.
But analysts at Cowen think the relative underperformance in ACB stock is an opportunity. In early March, Cowen swapped out CGC stock for ACB stock as its top pick in the cannabis sector, while slapping a $14 price target on ACB. That price target implies essentially 100% upside for ACB stock over the next twelve months.
If such a rally materialized, that would be a breakout moment for Aurora Cannabis stock. But, will it happen? Or is this just wishful thinking on behalf of Cowen?
I think it can happen. No matter which way you look at it, ACB stock is the cheapest option in the red-hot and soon-to-be-enormous cannabis sector. As this space grows, investors will increasingly seek exposure to it. But, not all of them will want to pay up for CGC stock. Instead, a lot of them will seek cheap exposure, and that means a lot of them will flock to ACB.
As such, over the next twelve months, I see ACB stock attracting a lot of investors seeking cheap exposure to a red-hot space. That influx of buyers will ultimately push ACB materially higher.
ACB Stock Is Undervalued
No matter which way you slice it, Aurora Cannabis stock is way undervalued relative to its peers.
On a trailing twelve-month basis, the other three Big 4 pot socks trade at or above triple-digit sales multiples. ACB stock trades at just 60 trailing sales. On a one year forward basis, the other three Big 4 pot stocks trade at ~20 to ~30 sales multiples. ACB stock trades at just over 10 forward one-year projected sales.
Meanwhile, CGC stock trades at over 60 last quarter's annualized net revenue. ACB stock trades at 35 last quarter's annualized net revenue. Each kilogram of cannabis sold last quarter is being valued at nearly $1.6 million over at Canopy. At Aurora, each kilogram of cannabis sold last quarter is being valued at just $1 million.
And, this has nothing to do with scale. Aurora has the second-largest sales base in this market behind Canopy. It has nothing to do with market share. Aurora controls about 20% of the Canadian adult-use market. It has nothing to do with capacity. Aurora has 500,000 kilograms per year in funded capacity. Nor does it have anything to do with profitability.
Instead, it has to do with its balance sheet and financial resources. Namely, the other three Big 4 pot stocks have scored some type of partnership and/or investment from a bigger consumer staples giant. Aurora has not. That creates a balance sheet and financial resource disadvantage for Aurora.
For example, Canopy is sitting on nearly $4 billion in cash and securities on the balance sheet, with a net cash balance of over $3 billion. Aurora has just $200 million in cash and securities on the balance sheet and a net debt balance of over $100 million. This means that Aurora doesn't have the financial stability or resources to compete with Canopy at scale, and this is what investors are pricing in.
Buyers Will Come In 2019
From where I sit, it increasingly appears as though Aurora's financial resource disadvantage is a short-term problem.
Aurora is growing rapidly despite not having a huge investment. It also checks off all the boxes a potential big-time partner would want. Global reach. Huge growing capacity. A seasoned management team. Big Canadian market share. High-profit margins. Low costs. Cheap valuation.
In other words, it only seems like a matter of time before ACB scores a big investment from some consumer staples giant. Once it does, the current valuation gap between ACB stock and other pot stocks will have no reason to exist. So, it won't exist. Buyers seeking cheap exposure to the cannabis space will rush to the stock. The valuation gap will close. ACB stock will rally.
Can this dynamic push ACB stock to $14 by the end of the year? Maybe not that high. But, based on competitor valuations, a 25% to 50% rally from here does make 100% sense.
Bottom Line on ACB Stock
Aurora stock is undervalued relative to its Big 4 pot stock peers. This undervaluation exists because of a financial resource disadvantage that will likely be removed in 2019. If it does get removed, the current valuation gap will cease to exist, and ACB stock will rally in a big way.
As of this writing, Luke Lango was long CGC and ACB.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.