Why Aurora Cannabis Soared Today

FAN Editor

What happened

Shares of Aurora Cannabis (NYSE: ACB) soared 10.1% as of 3:11 p.m. EST on Tuesday. The big move came after investment firm Cowen Equity Research initiated coverage of the marijuana producer with an outperform rating and a one-year price target representing a 45% premium over Aurora’s closing price on Monday.

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So what

Analysts are sometimes right, but they’re often wrong, too. The more important thing for investors to focus on is why analysts are bullish or bearish about a stock. In this case, Cowen analyst Vivien Azer especially likes two factors that are favorable for Aurora.

First, Azer thinks that Aurora Cannabis is well-positioned to be a leader in the Canadian recreational marijuana market and the international medical marijuana market. Cowen projects that the former will reach 12 billion Canadian dollars by 2025 (around $9 billion) and the latter will reach CA$31 billion (over $23 billion) by 2024.

This assumption seems like a pretty good bet since Aurora already is a leader in Canada and in international medical marijuana markets. The company claimed a 20% market share of the Canadian recreational pot market in the quarter ending Dec. 31, 2018. Aurora is also a leader in international medical cannabis markets, with 6% of its total revenue in Q2 coming from European sales.

Second, Azer expects that Aurora will be among the first Canadian marijuana producers to achieve consistent profitability. You might wonder about that prediction, considering that Aurora posted a huge loss in its last quarter. However, much of that loss stemmed from the company’s adjustments on derivative investments, especially its warrants for shares of The Green Organic Dutchman.

Azer’s probably right that Aurora is on a solid path to profitability. Aurora’s top line will almost certainly skyrocket over the next few years. The company’s massive scale of operations should allow it to drive down production costs. The combination of these two factors should lead to consistent profitability.

Now what

Is Aurora Cannabis a slam-dunk marijuana stock with a positive recommendation from Cowen? Not so fast. There are still plenty of hurdles to jump.

For now, at least, the market-size projections for Canada and the rest of the world remain elusive. Actual sales aren’t anywhere close to what Cowen expects at this point.

Aurora also must successfully integrate all of the businesses that it’s acquired over the last 18 months to have a shot at achieving profitability. That might be tough to do if the company continues to gobble up smaller marijuana businesses at breakneck speed.

Still, the underlying assumptions made by Cowen are probably pretty much on target. Aurora Cannabis appears to be in a good position to rank among the top leaders in the global marijuana market.

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Keith Speights has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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