Why Aurora Cannabis Stock Dropped 10% This Morning

Investors seem uncertain that a relatively 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 deal (or more than twice that, if Reliva hits certain financial milestones over the next couple of years).

That sounds like good news, but investors don't seem convinced that it is good news. Aurora Cannabis stock plunged more than 10% as soon as trading resumed this morning and hasn't gained back much since -- down 8.5% as of 12:15 p.m. EDT.

So what

Aurora interim CEO Michael Singer says the merger will "create a market leading international cannabinoid platform that we believe can deliver robust revenue and profitable growth." Investors, however, seem more worried about the price Aurora paid for that growth.  

At $40 million, the purchase price is about three times Reliva's $13.5 million in estimated annual sales -- which would be a bargain. (Aurora's own shares fetch 6.6 times trailing sales.) If Aurora ends up paying the extra $45 million it has agreed to, for hitting "milestones," however, the purchase price will be something closer to 6 times sales -- still a bargain relative to Aurora's own stock valuation, but much slimmer.

Now what

Also of concern: Forty million now and perhaps $45 million later will take a big chunk out of the $175 million in cash on hand that Aurora had at last report. Meanwhile, the company is carrying $430 million worth of debt (according to data from S&P Global Market Intelligence) and burning cash at the rate of some $550 million annually (over the last 12 months).

So, was it a good idea to spend nearly half Aurora Cannabis's cash reserves to acquire a new revenue stream just 6% as big as the revenues that Aurora Cannabis was already making? For today at least, investors think not.