source: Seeking Alpha
The cannabis sector, because of it being considered speculative by the general market, has been under a lot of pressure lately because of the growing risk concerning international trade wars, disappointing sales and the change in management at the formerly perceived face of the industry (Canopy Growth), and the ethics and performance debacle surrounding CannTrust.
In this article we'll look at how and why this has had an impact on Aurora Cannabis (ACB), and why I see it rising out of the ashes of the overall negative sentiment concerning the industry and this time and becoming the face of the industry in the near future.
It hasn't and won't do this by embracing the traditional way of doing business, such as giving up a large part of the company and control, in exchange for the infusion of capital from a large firm outside of the industry. After all, how did that work for Canopy Growth?
The cannabis sector
There are been a few major catalyst connected to the cannabis sector that have lowered market optimism over the last several months. Among them have been the growing economic fear from the trade wars, the weak earnings reports for Canopy Growth and CannTrust, and of course the debacle of non-compliance concerning CannTrust and the ouster of Canopy Growth co-CEO, Bruch Linton, and how it affected the cannabis sector.
The most important thing to consider to me is to ask the question of whether or not the cannabis industry has changed at the fundamental level, or the outlook for the future remains bright.
At the macro level, nothing has changed in the sector. There may be a lot of shuffling of leadership chairs going forward, but the industry itself will continue to grow at a significant pace over the next decade.
It should be understood that the combination of the fear trade rising, as evidenced by billions being invested in the gold sector, has pushed up gold stocks strongly since May; silver stocks should follow in the near future if the price of gold retains support and gradually continues to rise.
So with investors being more wary than they have been for some time, combined with uncertainty surrounding the current condition of the cannabis sector, which remains volatile, it's easy to see why emotion has, temporarily, driven sentiment more negative for cannabis.
Very few companies have escaped the downward pressure on their share prices, including Aurora Cannabis.
As for Canopy Growth, as I've stated far before Bruce Linton was removed from his position, that it wasn't the real market leader, even though it had received the largest cash investment in the industry from Constellation Brands.
But the original terms of the deal, which included effectively taking over the board with two of its own seats and the power to appoint two more independent board members, along with the warrants that when exercised, would give Constellation control of the company, easily pointed to the fact Constellation was going to steer the Canopy ship from that point on. It only needed a reason for making its move, which the latest, disappointing earnings report gave it.
Constellation had to be patient because Bruce Linton, for most, was considered the face of the cannabis sector, and Canopy Growth the top company in the industry. The concern was it could undermine the value of Canopy with the actions it took, which is exactly what has happened.
The announcement it was going to spend less and grow at a more measured pace, means it's going to gradually slip down the leadership board in the industry, and Aurora Cannabis will take its place. Not only that, but with a number of competitors ramping up production capacity as well, the lead Canopy had over them is going to shrink further, and probably going to be overtaken by several of its peers the market isn't looking at this time.
As for CannTrust, its lack of controls and ethics has been another negative catalyst on the industry, and things there continue to get worse, as more non-compliance violations have been found, and its former auditor reneged on its prior findings because the sources it used aren't considered trustworthy.
Aurora Cannabis is rising to the top
As my readers know, I've considered Aurora Cannabis to be the top cannabis company for some time, and have repeatedly stated that fact, based upon many elements, including global leadership in production capacity, its business model, long-term strategy, its lead in global markets, the licenses it has received around the world, and it top-notch scientific team, among others.
When taking into account the many pieces that make up Aurora Cannabis, there is no competitor that has them in place as Aurora does, and it'll take a long time for any of them to catch up, if they ever do, or if they even have the business model in place to make it a reasonable thing to attempt.
In regard to the long-term way the company approaches things, a couple of them give an idea of the patience and discipline it leadership engages in that will continue to grind away at its competitors. A few examples are its patience in moving into the American market, resistance to accepting a cash infusion which would disrupt its strategy, and the recent announcement it was going to grow some cannabis outdoors in order to experiment on developing superior and improved strains.
All of these aren't that impressive to the market, yet over the long term, I see them being extremely important to the long-term performance of Aurora.
The things the market considers weaknesses for Aurora, in my view are in fact its strengths. That includes its core business of being primarily a medical cannabis company. Its long-term partnership with the UFC to experiment with treatments for athletes using CBD products is another way the company is showing patience in developing revenue streams that will pay off for many years. With the FDA and governing bodies in other nations frowning upon unfounded treatment claims, having a body of research to back up its claims, presumably along with potential patents, is something the market hasn't even priced into the stock.
That, and the strong possibility treatments that can drive revenue like GW Pharmaceutical's Epidiolex will be developed, show the enormous growth potential Aurora has for the years ahead.
It's a major reason its market-leading production capacity is so important and a moat. It should be able to use its end product for extraction for the development of CBD products, research and development, and to sell into the medical and recreational cannabis markets. In the near future, no one else will even be close to Aurora in having core product for those purposes.
With the company continuing to drive down costs per gram, it's only going to get better.
I think Aurora Cannabis is going to start rebounding again, as the market starts to separate the wheat from the chaff in the industry, and understand the long-term positive growth prognosis for the cannabis industry itself remains in play
As for the trade wars and the fear trade that has emerged, that is likely to remain in place for now, with gold being one of the places investors are parking their money. That removes some of the speculative capital from the market, but as things start to settle down in the cannabis industry, and the market understands Canopy Growth was the wrong horse to bet on, it's obvious to me that Aurora Cannabis is going to be considered the top company in the world in the not-too-distant future.
Some may question that because of some of the fast-growing American-based cannabis companies, but their limitations at the global level means growth is going to have to be internal, for the most part, and once they can compete outside the country, if ever, the lead Aurora has over them will be astronomical.
I'm not implying Aurora Cannabis will never be overtaken by another company, only that over the next several years I see its differentiation and moat positioning it as the global leader.
The only reasons it hasn't already enjoyed that distinction is because some investors and analysts are using traditional metrics like capital infusion to measure value, along with the immediate sales of recreational pot to make their determinations. The last earnings report of Canopy and the firing of Bruce Linton show that those metrics weren't the correct metrics to use.
For a time it will appear the cannabis market is in limbo in relationship to a market leader, but over the next year or a little longer, there is no doubt in my mind Aurora Cannabis will be considered the leader by the majority of the market, and should be able to hold that position for at least several years, and probably much longer, for the reasons mentioned above.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.