Aurora Cannabis (ACB) is taking another hit as the company proposes a reverse split to satisfy NYSE listing requirements. Such moves to boost the stock price are typically signs of companies in distress, but the move doesn’t alter the financial position of Aurora. The company is still participating in 2020 growth catalysts while the stock will remain volatile during this period.

Reverse Stock Split Details

The Board of Directors has proposed that Aurora Cannabis complete a 1-for-12 reverse stock split. The company now lists 1,313,494,990 common shares outstanding leading to a post-split share count of 109,457,915 shares.

The company forecasts the reverse split to take place around a month from now on May 11. Aurora Cannabis has an ongoing at-the-market equity plan suggesting additional shares will be sold to raise cash over the next month leading to a higher share count when the split is complete.

The key to the reverse split is the stock has a market valuation below $1 billion before and after the split with the share price at $0.71 here. Aurora Cannabis would trade near $9 following the split without any further stock changes.

Typically, stocks trade down after a split as the higher share price makes the stock appealing to short sellers again. Aurora Cannabis suggests FQ3 results were on plan for small sequential growth and the company remains on path to reach business transformation goals of reducing quarterly operating expenses to C$45 million. The ability to hit revenue targets while cutting costs is a major positive going forward.

Rite Aid Example

The majority of reverse splits end up negative for existing shareholders as the move does nothing to improve the fundamentals of the business that pushed the stock so low to require a split. Rite Aid (RAD) is a prime example of a company that thrived after a reverse split providing some hope for Aurora Cannabis shareholders.

The pharmacy chain announced a 1-for-20 reverse split back over one year ago in January. At the time, Rite Aid was a penny stock similar to Aurora Cannabis.

After the split, the stock traded around $10 and eventually hit a low of $5. By the end of 2019, Rite Aid soared to over $20 and currently trades above the split levels near $15.

If anything, Rite Aid is a weak third player in the pharmacy space while Aurora Cannabis remains a top player in the Canadian cannabis market and the push into global operations. The cannabis company made several mistakes along the path to this point of needing a reverse stock split to meet NYSE minimum requirements of $1, but Aurora Cannabis appears in a far better competitive position here.

Takeaway

The key investor takeaway is that the valuation equation for Aurora Cannabis isn’t impacted by a reverse stock split. The stock will trade volatile over this next few months, but any investors liking the stock prior to the split should like Aurora Cannabis on any dips now.

The key to the story remains whether the company can turn current sales levels into a profitable business. The preliminary March quarter results suggest Aurora Cannabis is on the right path just in time for more retail stores in Ontario when the Covid-19 pandemic wanes.

All in all, Wall Street isn’t jumping for joy — but isn’t sounding the alarms, either. TipRanks analysis of 15 analyst ratings shows a consensus Hold rating, with one analyst suggesting Buy, 11 saying Hold and 3 recommending Sell. The average price target among these analysts stands at US$1.69, which implies 138.5% upside from current levels. (See Aurora Cannabis stock analysis on TipRanks)

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