Why Aurora Cannabis Needs $ 750 Million?

Canadian giant of cannabis Aurora Cannabis (NYSE:CBA) turned heads in early April when the company announced plans to raise $ 750 million through a blended offer for the next 25 months.

On the surface, it's a little shocking. Aurora is one of the largest marijuana stocks in the world. Its growth is very fast and its margins are good. Thus, the need to raise funds raises some eyebrows and has created a weakness in the ACB stock.

The question now is "why". Why should one of the world's largest cannabis companies raise $ 750 million?

The answer is rather simple. Aurora has only $ 110 million in cash on the balance sheet. His three biggest marijuana fellows all have a lot more money than that, while two peers have billions of dollars in cash on the balance sheet.

L & # 39; s involvement? All of Aurora's peers have more firepower than Aurora, and two of them have a lot more firepower. This is not good, as the cannabis industry is in its infancy and today's big investments will be rewarded with strong growth tomorrow.

As a result, Aurora needs to raise $ 750 million, primarily to increase the power of its investment to better match its peers. This will allow Aurora to grow faster, better defend its leading position among marijuana stocks and, most importantly, dive into the extremely valuable US market, where Aurora has no presence today. .

Overall, the off-the-shelf offer is actually good news for the ACB title. The only thing that has held back this stock is the company's lack of resources to deal with large-scale competition. A capital increase will remedy this adverse situation, meaning that ACB's shares should be released for take-off.

Aurora needs money to compete

Clearly, Aurora needs more money to compete on a larger scale with her more supported peers. And since no major consumer goods company has yet offered a billion-dollar offer, Aurora is finally looking to raise that money itself.

In general, the cannabis industry is at the beginning of a long-term growth trajectory. In growing markets, investments are critical to long-term success. A company that invests wisely today will reap the benefits of this investment tomorrow by gaining market share in a rapidly growing market. Meanwhile, marijuana stocks that are not investing today will suffer tomorrow because they will lose some of their capital to the benefit of their peers who have invested.
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Aurora is now in danger of falling into the latter category.

Two of Aurora's peers, Cover growth (NYSE:GSC) and Cronos (NASDAQ:CRON), have recorded multi-billion dollar investments from global giants of staple consumption. Their balance sheets are backed by billions of dollars of investment, partnerships and expansion. Canopy has more than $ 3 billion in cash. Cronos is expected to reach nearly $ 2 billion.

Aurora, meanwhile, did not hurt as much and the money on the balance sheet represents a meager $ 110 million. In theory, this means that for every investment made by Aurora, Cronos can generate 20 and Canopy into a 30 factory. In the end, this allows Aurora to lose market share in the global cannabis market.

The addition of $ 750 million balance sheet changes things. That would give Aurora a firepower of $ 860 million. It's a lot more respectable beside the $ 1 billion holdings at Canopy and Cronos. Thus, by reducing this gap, Aurora will have the resources to compete on a large scale with its larger peers.

This money will stimulate the expansion of the US market

Globally, this $ 750 million will help Aurora tackle the American cannabis market, which will soon be huge and very important.

The US cannabis market is still in its infancy, but it is growing rapidly and is expected to become huge someday. Several states have legalized cannabis, hemp is now legal across the country through the adoption of the 2018 Farm Bill, and many watchful observers are optimistic that the national legalization of marijuana does not exist. is not so far. As a result, many Canadian cannabis giants, such as Canopy Growth, are also positioning themselves to dominate what analysts see as a $ 100 billion cannabis market.

A Canadian cannabis business that has not yet entered the US market? Dawn. And it's not because they do not want to.

In January 2019, Cam Battley, CEO of Aurora, said the company would announce a "CBD strategy derived from hemp to enter the US market in the coming months." It is April 2019 and we have not heard much about a concrete plan for this expansion strategy. Certainly, the company has significantly increased its presence in Europe during this period. But nothing has been firmly announced on the side of US expansion.

Why? Probably because of a lack of resources. Canopy makes moves in the US market with $ 3 billion of cash on its balance sheet. On top of that, Aurora can not do much with $ 100 million. But with $ 860 million, the playing field is much more equal. Aurora can finally make noise.

Overall, I think this $ 750-million increase is the fuel that will allow Aurora to finally establish itself in the US cannabis market. This is great news for the ACB title. The only thing that slowed down this stock was its inability to expand its reach due to lack of resources. All this will change if the company uses the newly raised growth capital to enter the US market. A move of this magnitude would likely result in a healthy recovery of the CBA stock.

Conclusion on the ACB stock

On a pure appraisal basis, ACB is as cheap as in the world of cannabis. This relative under-valuation can be attributed to a lack of financial resources in the balance sheet. But this unfavorable wind is disappearing and, in so doing, the relative deviation from the undervaluing of the ACB stock is also expected to disappear, meaning that this marijuana stock could prepare for take-off.

At the time of writing, Luke Lango was long, CGC and ACB.