Bigger Isn’t Always Better
Yesterday, Aurora Cannabis (NYSE: ACB) reported its second-quarter earnings results.
The earnings call was closely watched by the industry — after all, Aurora is one of the largest cannabis stocks in the world right now. And it’s the largest pot producer in terms of capacity.
At first glance, the numbers don’t look good for Aurora Cannabis.
But it’s not the revenue numbers that are the issue here. Business is booming — the company generated more than C$52 million in net revenues in the last three months. The real problem is goodwill.
“Goodwill” is an accounting term. It’s basically the premium that a company pays when it buys another company. Sometimes, goodwill is justified because it reflects the premium that a firm needs to shell out to buy a fast-growing company whose value isn’t easily shown on the books.
Other times, it’s an indication that a company overpaid for an acquisition.
In Aurora’s case, the firm came into this week with a massive C$3.17 billion in goodwill on its books. And management said they expected to write down as much as C$775 million of that goodwill this quarter.
In other words, the premium management paid for a big chunk of their acquisitions is worthless.
Thing is, Aurora’s press release didn’t even mention the write-downs, which add up to more than 10 times its revenues.
Odds are Aurora will need to write down even more of that big goodwill balance in the quarters ahead.
It’s an important lesson that the cannabis operators that struggle or fail in the coming months won’t necessarily be the tiny companies that can’t get traction — massive names like Aurora are likely to see their fair share of failures too.
Sometimes the bigger they are, the harder they fall.
In the cannabis world, cash is king. Because cannabis is in a sort of gray market in the States, it’s still difficult for businesses in this industry to get loans, as most can’t just walk into a federally insured bank and get a loan.
Use this as a lesson whenever you’re looking at investing in pot stocks in the future.
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Chief Technology Expert, Technology Profits Daily