Aurora stock has taken a battering in 2019, and it could be about to get a whole lot worse. While some industry giants, like Canopy Growth (TSX:WEED) (NYSE:CGC) and CannTrust (TSX:TRST) (NYSE:CTST), have seen their value almost wiped out as a result of scandals, Aurora Cannabis (TSX:ACB) (NYSE:ACB) has tanked under the pressure of a nascent market still struggling to find its feet.
Disappointing fourth-quarter results and missed guidance signaled a longer pathway to profitability than advocates of the "green rush" anticipated, and looking at the whole picture today, that pathway could get a lot longer.
Oversupply Weighing in Aurora Stock
Aurora shares are down 43% since the company's last earnings call on September 11, and with Q1 fiscal 2020 results expected early next month, it doesn't appear as if that downward trend shows any signs of slowing. Analysts expect Aurora Cannabis to report revenues of $99.2 million CAD, a marginal increase from the previous quarter figure of $98.9 million CAD. However, revenue in this quarter will have been driven by a massive "dumping" of its inventory at wholesale prices, which artificially stimulates sales to compensate for underwhelming customer demand.
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Analysts believe that this massive oversupply is a weight on Aurora stock, with some even predicting that it could drop 90% to its tangible book value. To compound this further, it is reported that the illegal market still holds about a 90% market share in Canada, meaning that the offloading of excess inventory will more than likely find its way to the black market. Statistics from Disruption investors show that cannabis companies are producing over 350,000 kilograms per month, but selling less than 10,000 kilograms.
Legalization 2.0: A Catalyst for Change?
The passage of legalization 2.0, which will see cannabis derivatives on the market by mid-December, could provide a much-needed catalyst to turn Aurora stock around. However, the same issues are expected to persist from the 1.0 market, with a lack of brick-and-mortar storefronts remaining a glaring issue. If Aurora Cannabis is struggling to offload its flower product due to a lack of storefronts to actually sell it in, it's difficult to see how it will circumvent this problem with derivative products.
Aurora stock is down nearly 65% from a March peak, and its current value of $4.81 is hovering just above a 52-week low. For investors, the situation around Aurora does not paint a pretty picture and shows no signs of improvement ahead of that earnings call next month.
What do you think?
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