Among the list of growing industries, legal marijuana has found its place near, if not at, the top. So much so, estimates of the U.S. industry made by investment firm Cowen & Co. in 2016 pointed to annual sales potential around $50 billion by 2026. More recently, ArcView and BDS Analytics forecasted North American sales to grow to $24.5 billion by 2021. With robust sales growth, marijuana stock valuations have enjoyed massive appreciation as the wave of consumer support in favor of cannabis is gaining momentum.
The country spearheading this marijuana industry growth has not been the U.S., but Canada, where medical marijuana has been legal since 2001.
Canada will soon be the first developed country – second only in the world to Uruguay – to legalize marijuana for recreational use. In three months, the Senate will vote on the issue; with the expectation of its passage, tax regulations and plans for implementation already in place, and recreational sales may generate an additional $5 billion annually.
Operating under the assumption of legalization, Canada’s marijuana growers have poured as much cash as they can justify into expansion projects to increase production capacity to deliver the expected increase in demand.
Aurora Cannabis (NASDAQOTH:ACBFF) is widely believed to be among the top tiers of cannabis producers. With the biggest deal in the history of the marijuana industry finalized last week, the company is now poised to take on other industry giants.
There are five takeaways from marijuana stock Aurora Cannabis’ acquisition of CanniMed Therapeutics that investors and shareholders need to know.
With the acquisition of CanniMed Therapeutics finalized last week, Aurora Cannabis has become an even more powerful figure in the industry, in better position to take on the largest marijuana stock by market cap and kingpin, Canopy Growth Corp (NASDAQOTH:TWMJF). Following its close on the acquisition, Aurora offered updates on future strategies and output, which potential investors and shareholders will want to take note of.
1. This marijuana stock acquisition was pricey.
This deal easily made history as the most expensive acquisition in the history of the marijuana industry. At the time of the initial announcement, the deal was worth roughly $765 million in cash and stocks. When the final tally came in post-closing, a press release from Aurora Cannabis stated that the company also paid $93 million in cash to purchase what remained of CanniMed that Aurora didn’t already own (87%) along with an issuance of approximately 62.8 million common stock shares. When all is said and done, Aurora paid almost triple CanniMed’s per-share value as of mid-November, meaning investors will expect significant returns in the coming years.
2. This raises the bar on marijuana stock Aurora Cannabis’ production figures.
Aurora’s acquisition increases the company’s expected annual production from the figure fairly recently reported in its operating results from the second quarter. The anticipated annual output post-deal is 283,000 kilograms of dried cannabis, which places Aurora squarely as the first or second largest domestic producer in terms of annual production. Canopy Growth Corp. may have the advantage with capacity expansion, but it is has not offered any production guidance to the industry or Wall Street.
With the combined forces of Aurora and CanniMed, the entity claims upwards of 45,800 medical patients and 23.1% market share among 15 of the top licensed cannabis producers, according to current quarterly filings. Pending Canada’s legalization of recreational marijuana, Aurora should be well positioned to land contracts for long-term supply.
3. Aurora Cannabis marijuana stock is turning part of its focus to cannabis oils.
The combined entity of Aurora and CanniMed have outlined a list of strategic goals and objectives, one of the top being the production of cannabis oils:
“Accelerate construction of the previously announced (by CanniMed) cannabis oils processing facility, with a design capacity of up to 720,000 liters of annual oil production. Leveraging this capacity and the extraction capabilities of RTI [Radient Technologies] will position Aurora as leader in cannabis and hemp extraction capacity.”
This strategic shift reflects what is likely to become a trend among the most lucrative marijuana stocks – branching out beyond solely dried cannabis to focus on cannabis extracts and oils – which offer significantly higher price points and higher margins. Cannabis oils and extracts offer the added benefits of less commoditization and competition compared to dried counterparts, and padding margins for marijuana stocks.
4. One of the core strategies of Aurora Cannabis weed stock is geographic diversification.
Currently, Aurora Cannabis claims seven countries of operation – Canada, Germany, Denmark, Australia, Italy, Cayman Islands and South Africa – with plans for further expansion. Between CanniMed’s existing distribution network and Aurora’s thriving production, medically legal countries ought to find the entity an attractive option for supply agreements.
It’s important to bear in mind the likelihood of Canada experiencing a glut among its domestic growers; international expansion, therefore, will play a critical role for growers in providing additional channels for distribution of excess product.
5. The shareholders of this marijuana stock are virtually drowning in dilution.
As was previously stated, Aurora purchased CanniMed’s remaining stakes in part with an issuance of 62.8 million shares. This move, while no surprise, was still one of a series of similar moves Aurora has made that have resulted in an inflation of the company’s outstanding share count. Nearly 490 million shares have been added to the share count between the fiscal end of 2014 and the most recent quarter, an explosion in excess of 2,900%. These newly issued shares, per the acquisition, will significantly add to the inflation, along with convertible debentures, and stock options and warrants.
Keep in mind that these shares pose several negative consequences. For one, they dilute investors by minimizing each share’s scarcity. And secondly, they decrease the likelihood of the marijuana stock producing profits that are meaningful. Step back a few years, when a profit of $50 million would have translated to earnings of $1 per share; whereas today, that $50 million wouldn’t be worth $0.10 in EPS after factoring in new shares.
In closing, investors and shareholders are left without guarantees of benefit, even with Aurora positioned as an industry leader.
(For further analysis of Aurora Cannabis, read Which of These Marijuana Stocks is a Better Investment?)