Aurora Cannabis House of Cards: A Company Built on Hype

Grizzle has always viewed Aurora (TSE: ACB, NYSE: ACB) as the ticking hype time bomb in the emerging cannabis sector.  Now the master of hype, Chief Corporate Officer (aka Chief Promotional Officer) Cam Battley has exited stage right in a clumsy weekend resignation.

The official press release was an absolute mess. Battley was the only public face for the company and no reason was given for his resignation — say something, anything… here’s a good stock IR handbook reason: ‘He wants to spend more time with his family… etc etc’.

So investors are left assuming the worst — Battley jumped ship. The mistruths and inability to execute anywhere close to guidance had clearly reached a tipping point.

In our review of Aurora’s Q1 2020 earnings we explicitly questioned the fact we haven’t seen any write downs from the company even though revenue was down 20% — this was a very big red flag.

It’s clear that Battley didn’t want to deal with anymore ‘red faced’ incidents — it’s a very hard pivot from promo to operator.

Building a Global Brand with a CEO that is MIA

Terry Booth is quite literally the most under-qualified CEO to run a $3 billion company.

One of the biggest curiosities of Aurora was the fact that it was rudderless, a CEO in Terry Booth who literally is always missing in action.

For any other industry this would have been a kiss of death for the company, but for corporate cannabis it was no biggie. In Battley they found a promotional voice that warmed retail investors’ ears. What could go wrong if everything was going amazing?

Investors are now in for a rude awakening, Terry Booth is quite literally the most under-qualified CEO to run a $3 billion company.

To say the very least it’ll be fascinating to see him step up in this crisis period. Our bet is the market won’t like what they see one bit.

 

A Bloated Billion Share Count that Even Nelson Peltz Can’t Rescue

We’ve always held the view that Aurora stock was fundamentally broken out of the gate. The company liberally threw around shares as it went on an acquisition spree.

It was so nonsensical, the company has reached a billion shares outstanding, a feat no other cannabis company has matched.

In a classic Aurora ‘hype’ move they announced the hiring of billionaire investor Nelson Peltz as an advisor in March of this year. It effectively amounted to a giveaway of options for him literally having to do nothing, it was classic Aurora. The share price rose 9% on the day — sell the hype when all else fails.

 

Aurora Stock in Trouble: Liquidity Stress + Rich Valuation

We viewed Aurora as one of the most grossly overvalued companies in the cannabis equity universe, with the stock trading at 28 times analyst estimates for 2021 EBITDA (a measure of cash flow). Comparable industries like liquor, beer, and big pharma trade for 10x-15x EBITDA.

More troubling, the company has approximately 6 months of cash left. We highlighted the liquidity issues in the sector in our recent deep dive on the industry ‘Drowning in Ditch Weed‘.

Months of Cash Left as of Latest Filing Date

Source: SEDAR, Grizzle Estimates

An ugly 2019 for Aurora is about to get a whole lot uglier. The company has already been grossly under-performing its large cap cannabis peers, down -56% year-to-date.

The stock is a walking short-selling target. The combination of gross overvaluation and liquidity stress make it an easy kill for hedge funds trying to end 2019 on a high note.

Source: Y-Charts