ACB Stock: Want to Reduce $ 1.8 Billion? Invest in aurora cannabis

on Tuesday, Aurora Cannabis (NYSE:ACB) Announced a potentially massive 1.8 billion CAD ($ 1.37 billion) write-off for Q4. Simultaneously, the Canadian marijuana company announced that it had chosen a new CEO, its chief commercial officer Miguel Martin. The market responded with a setback, sending ACB stock down 12% before recovering.

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But it is a trick that other companies have used for a long time.

When struggling companies need to let go of past bad decisions, they throw the old CEO under the bus. Hewlett Packard (NYSE:HPQ) Famously fired CEO Leo Apotheker in 2012 when he wrote an $ 8.8 billion sum over the failed autonomy takeover. This clears the slate for the new CEO.

However, Aurora Cannabis would require much more than defect-shifting to survive. Here’s what Aurora’s stock investors need from the next CEO.

ACB Stock: The Weakest Link in the Promising Cannabis Industry

Readers will know that I have seen the legal hemp industry for a long time. Americans spend almost as much on marijuana as they do on tobacco products, and federal legalization will open the floodgates to legitimate benefits.

But aurora cannabis remains a terrible company.

Over the years, the company has overcome farming, ignoring marketing and sales. There was an implicit assumption that the “road” was a terrible quality of weed; Once Aurora created better quality strains, users would change immediately.

They were completely wrong.

The ACB management clearly underestimated the illicit market. Not only were “heritage producers” competitive in quality. The cost of their multi-tiered distribution network was also relatively low. Heritage producers, after all, competed against each other for decades.

Today, the aurora can now sell through approximately 800 million CAD and produces three times more weeds than it can burn. Its 1.8 billion CAD write-off represents legally required recognition of previous failed investments. Read about Aurora’s troubles here.

ACB - Share Price August 2020

I have warned of such a poor business plan in the past – just because you are in a growth industry does not guarantee success.

So how can the new CEO replace Aurora Cannabis?

ACB needs to look like Rasul …

… And that’s not good.

Controversial vaping company Juul Took America by storm in 2016. Targeting teens and young adults with color advertisements, the firm increased US sales by 640% that year and 800% the following year. Nicotine pods in hundreds of flavors are populated from grocery stores to gas stations almost overnight. And started to smack young smokers.

At its peak, Juul sold approximately $ 1 billion back and pod annually, a valuation of $ 38 billion. And by 2019, 27.5% of all high school students reported some degree of vaping.

If Aurora wants to recapture its $ 15.7 billion enterprise value, CEO Martin will have to follow: cheap, mass-market THC products for a new generation.

Aurora stock needs a cheap high

As unethical as Joule’s marketing campaigns might have been, they contained elements similar to other successful “vice” companies: a cheaper-to-produce product that surrounded powerful marketing. Liquor companies regularly target to inspire a new generation of youngsters, also running advertisements during college sports.

And the worst offender? Big tobacco. Cigarette companies often gave free cigarettes in the 70s through the 90s to promote their brands (and addicted to new smokers).

In other words, “vice” companies do not value production or market share. It is in marketing to a new audience.

Can the new CEO of ACB navigate the cannabis minefield?

Successful “vice” companies need to keep up with massive public scrutiny.

For example, Zula’s success, parent and regulator are the same. In early 2020, the FDA banned mostly flavored nicotine pods, bringing the market value of Juule to $ 12 billion.

Still, if CEO Martin wants to turn ACB into a multi-billion dollar business, his best bet would be:

First, develop a cheap THC vape cartridge like the Canopy Growth’s 510 thread format device. There is no need to fight heritage producers in traditional farming when you can leverage their size to create a completely different product.

Secondly, create an aggressive two-way marketing plan aimed at 1) converting existing combined smokers and 2) ethically finding new users a safe way to experiment.

Finally, take a more proactive stance to ensure the safety and responsibility of your users. “Smoking wet,” or the use of tainted marijuana, has long been a problem in the illegal cannabis industry – legal manufacturers need to prove that they can do better for society.

What’s next for ACB stock?

If Miguel Martin can achieve these three mileposts, the ACB will reward stock holders with 10x-30x returns. Some companies have huge capacity of ACBs.

But if Martin fails on any of the three mileposts… then what better way could there be than to lose another 1.8 billion dollars?

At the date of publication, Tom Yeung did not hold (directly or indirectly) any position in the securities mentioned in this article.

Tom Yong, CFA, is a registered investment advisor on a mission to bring ingenuity to the world of investment.