If you’re going to buy Aurora Cannabis (NYSE:ACB) stock — and I don’t recommend that you do — you have to do so as a turnaround play.

After all, we’re in what I’d call “phase two” of Aurora’s strategy.

Phase one was a pedal-to-the-medal, grow-at-all-costs effort. Aurora bought businesses all over the world using both ACB stock and cash raised via debt that converted into ACB stock.

The plan worked for a while. But then the oversupply in Canadian cannabis became blindingly obvious. ACB fell along with the sector. That blew up the aggressive strategy, which required a higher share price to entice those selling their businesses and buying Aurora’s debt.

Suddenly, Aurora had a stretched balance sheet, way too much capacity and an unprofitable business. Faced with such a toxic combination, management did the only thing it could do: slash. It slashed capacity and slashed costs.

The problem for ACB stock is that the endless cutting that has marked the most recent phase of the business simply hasn’t been enough. And, at this point, it’s difficult to see what will be. With such a plethora of options for cannabis investors — not just in Canada, but in the U.S. — there’s simply no need to chase a turnaround that already is near an end.

No Good Options

Long-term, I’m still bullish on the global opportunity for cannabis. But as I’ve written before — and as I’ve said about other growth markets, too — that doesn’t mean that every cannabis stock out there is a buy.

Instead, the size of the opportunity makes stock-picking in the sector all the more important.

A big market like cannabis will create big winners. Picking a loser not only means potential losses on that investment, but missing out on another that could have been a game-changer.

So at the very least, if you’re going to pick a cannabis stock, you should pick one that has a clear path toward long-term benefits from the industry’s expansion. I don’t see that path for Aurora.

The company already is struggling with growth to begin with. In the fiscal second quarter (ending Dec. 31), Aurora’s revenue declined quarter-over-quarter. In September, chief executive officer Miguel Martin admitted the company had lost its market share lead in consumer cannabis.

But Aurora also finished that quarter with almost 500 million CAD in debt which will need to be repaid. And in the first half of FY2021, the company burned 200 million CAD.

The balance sheet problems are why Aurora slashed costs to begin with. Operating expenses incredibly dropped by more than half in Q2 relative to the year-prior quarter.

Dilution and ACB Stock

That’s not good news. Good cannabis companies are investing behind their businesses to acquire customers which will be profitable for the long haul.

Aurora isn’t that doing that. Aurora can’t do that. It needs to get close to profitability first — but isn’t all that close. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was still a 12 million CAD loss in Q2.

There are no more costs to cut. Revenue isn’t growing. So what’s Aurora to do?

It’s likely going to dilute shareholders. Last month, the company filed a so-called “shelf prospectus” that would allow it to issue up to $1 billion in securities.

This is a long-running problem for Aurora. Before last year’s reverse split, the company had well more than 1 billion shares outstanding. It issued another $150 million in stock just in November, which added another 20 million shares to the count as well as 10 million warrants with an exercise price of $9.

Whatever portion of Aurora an investor owns at the moment, she’s likely to own even less by the end of this year.

And even with that dilution, we don’t have much evidence that Aurora suddenly is going to ramp up growth. The international business hasn’t impressed. The Canadian business is slipping. And Aurora really has no U.S. presence, despite its claims that a CBD (cannabidiol) business provides a beachhead.

There are simply many better options for cannabis investors. Even U.S. companies look intriguing, given they offer their own potential for international growth.

At the moment, Aurora doesn’t offer that potential — anywhere. Until that changes, pass on ACB stock.

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