Why Aurora Cannabis Stock Dropped 10%Today

Financiers appear unsure that a reasonably big bet on CBD oil will pay off.

What happened

Canadian cannabis kingpin Aurora Cannabis ( NYSE: ACB) closed its acquisition of Massachusetts-based cannabidiol (CBD) maker Reliva LLC last night in a $40 million offer(or more than two times that, if Reliva strikes specific financial turning points over the next couple of years).

That seems like great news, but financiers don’t appear persuaded that it is excellent news. Aurora Marijuana stock plunged more than 10%as soon as trading resumed today and hasn’t gained back much given that– down 8.5%as of 12: 15 p.m. EDT.

Chemical diagram of cannabidiol next to a bottle and eyedropper.

Image source: Getty Images.

So what

Aurora interim CEO Michael Singer states the merger will “produce a market leading global cannabinoid platform that we believe can deliver robust earnings and profitable growth.” Financiers, however, appear more anxious about the cost Aurora paid for that development.

At $40 million, the purchase rate is about three times Reliva’s $135 million in estimated yearly sales– which would be a deal. If Aurora ends up paying the extra $45 million it has actually concurred to, for hitting “milestones,” nevertheless, the purchase rate will be something closer to 6 times sales– still a bargain relative to Aurora’s own stock valuation, however much slimmer.

Now what

Also of concern: Forty million now and perhaps $45 million later will take a huge portion out of the $175 million in cash on hand that Aurora had at last report. The company is bring $430 million worth of financial obligation (according to information from S&P Global Market Intelligence) and burning money at the rate of some $550 million every year (over the last 12 months).

So, was it a great idea to invest nearly half Aurora Cannabis’s money reserves to obtain a brand-new profits stream just 6%as big as the revenues that Aurora Cannabis was currently making? For today at least, investors think not.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.”> disclosure policy”>




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