Our Aurora Cannabis stock forecast for 2019 may not seem realistic but it really is a very rational forecast. It is based on the chart of Aurora Cannabis (ACB.TO) combined with industry strength. We derive a major top of $75 which we believe will be set in 2019 or 2020. Our Aurora Cannabis stock forecast for 2019 or 2020 is $75 which would mark a major top.
Note that we consistently published bullish forecasts on top cannabis stocks: Canopy Growth stock forecast for 2019, Emerald Health Therapeutics stock forecast for 2019, Aurora Cannabis stock forecast for 2019, Cannabis Stocks in Canada Forecast for 2019. These are not meant to exaggerate in any way. This is just meant to identify reasonable price target in a market that is set to become ultra hot in 2019 and 2020.
Is A Bullish Aurora Cannabis Stock Forecast Justified?
It of course all starts with the legalization of cannabis in Canada. On October 17th, 2018, Canada legalized the usage of cannabis. This led to a major boom in Canadian cannabis stocks prior to the event.
The next phase in this boom market is the Hemp Farming Act of 2018. As per Wikipedia this is an act that was a proposed law to remove hemp (defined as cannabis with less than 0.3% THC) from Schedule I controlled substances and making it an ordinary agricultural commodity. Its provisions were incorporated in the 2018 United States farm bill that became law on December 20, 2018.
Forbes wrote a good piece about this, and it is worth reading. The conclusion from this article:
This bill offers a legal new path to growth for cannabis producers in the US. By some estimates, the CBD market is already a billion-dollar industry in the US. Passage of this bill opens the door for that market to greatly expand, offering revenue growth, funding for R&D and new products for consumers. And for the first time in a long time, I can say that (some) cannabis is legal in the US.
Financials for our Aurora Cannabis Stock Forecast 2019
This a list of top level financials for Aurora Cannabis:
- Market cap: $10.2B
- P/E: 85.8x
- Price/Sales: 134x
- Diluted EPS: 0.29
- Cash: $494M
- Short % of shares outstanding: 3.7%
- Long term debt of $200M maturing in 2021
What stands out is the very high readings in P/E and Price/Sales, the high cash level as well as the high debt level.
On the first point (high P/E and Price/Sales) this is typical in very fast growing companies where revenue rises and earnings cannot keep track with it. We remember Amazon with similar readings a couple of years ago. We are not too concerned about this given the highly unusual and disruptive state of this market.
On the second point (high cash level) this of course is great. It offsets the debt and creates a buffer to support the fast growth.
On the third point (high debt level) we believe it is justified in case the money is well spent. If a loan results in a decent revenue stream it is a good thing from an economic perspective.
Capacity Growth as a Key Metric for Aurora’s Cannabis Stock Forecast
Given the above items we believe revenue growth is one of the most important metrics to consider for our Aurora Cannabis stock forecast for 2019 and beyond.
Related to this is the production capacity and production capacity growth. That’s because in the first place the revenue will be created by selling quality cannabis to international markets.
This is what we see in the latest earnings release:
Based on preliminary (unaudited) results, the Company anticipates revenues for Q2 2019 of between $50 million and $55 million (net of excise taxes), compared to $11.7 million for the same quarter in the prior year, and compared to $29.7 million for the previous quarter ended September 30, 2018 . The results reflect an anticipated revenue growth rate in excess of 327% compared to Q2 2018 and in excess of 68% compared to the previous quarter.
Aurora Cannabis continues to ramp its production capacity up from 70,000 kg / annum as reported in November 2018, to approximately 100,000 kg / annum in January 2019. It reaffirms its expectation to achieve at least 150,000 kg / annum of production capacity within the first 3 months of 2019.
What stands out is the second paragraph, especially the info indicated in bold. The growth of the capacity is exactly what we want to see to justify a bullish Aurora Cannabis stock forecast. Their production capacity more than doubles in less than 5 months.
To put this into perspective we picked out two other promising producers, and compare their production capacity:
- Organigram, with a market cap of $1B => capacity grows from from 36k kg / year in January of 2019 to 113k/year in Oct 2019. This is a very promising growth rate. It also shows how much larger the one from Aurora Cannabis is.
- Cronos Group, with a market cap of $5B => capacity grows from 40k kg / year currently to 77k kg /year later in 2019.
Both the volume of the capacity as well as the growth rate justifies a bullish Aurora Cannabis stock forecast for 2019 and beyond.
We absolutely want to see continued confirmation of Aurora Cannabis executing on their plan, in their press releases and quarterly earnings reports.
Aurora Cannabis Stock Forecast for 2019: The chart structure
Because of the above mentioned items we believe that a bullish outcome on Aurora’s chart will be justified.
The long term chart of Aurora Cannabis has a very clear and certainly interesting chart structure. It has a rising support line on the one hand and a double top pattern on the other hand (with a clear trend to make it a triple top).
In case the current trend in the cannabis market continues, both in the U.S. with the Hemp act of 2018 as well as the continued supply/demand deficit in Canada, we will know for sure that a breakout on Aurora’s chart is in the making.
Interestingly, the current setup reminds us of the situation in 2016/2017. Once the triple top gave way to a breakout the price of this stock rose 5x in a matter of 3 months.
Do we anticipate that exactly the same thing will happen? As always, history does not repeat, but it may rhyme. We believe a giant breakout on Aurora’s chart is in the making which will bring the stock price many multiples higher.
We set our price target for a major top at $75 in 2020 (the latest 2021). This not an average price for 2019 or 2020, it is more of a blow off top we expect to see. It is based on the 5-fold rise after its breakout similar to the previous 2 instances.
Depending on the market conditions and evolution we may adjust this forecast.
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