Why Aurora Cannabis Rallied Almost 200% In 3 Days — And What's Next For The Pot Stock

Aurora Cannabis Inc. ACB shares are cooling off after a three-session-long rally that netted the stock a gain of about 194%.

Aurora's Q3 Results Kickstart The Rally

Ahead of the quarterly results released May 14, Aurora Cannabis stock was down about 74% year-to-date, ravaged by the broader market weakness orchestrated by the onset of the COVID-19 pandemic and its subsequent impact on the global economy.

After adding about 15% ahead of the earnings release, the stock jumped 69% May 15 to $11.20. The Canadian cannabis company reported net revenue growth of 18% for the fiscal year 2020 third quarter. The adjusted EBITDA loss narrowed from CA$80.3 million ($57.8 million) to CA$45.9 million ($33 million). 

"Aurora has a long way to go to reach positive EBITDA, but the company is making progress on cost cutting, while increasing its consumer market share and maintaining its leading medical business," CIBC analyst John Zamparo said in his review of the third-quarter results.

Short Squeeze Stokes The Aurora Rally 

In mid-April, Aurora announced measures to strengthen liquidity and also a business transformation plan. The company announced that its board was enacting a 1-for-12 reverse stock effective May 11.

With the short interest increasing sharply after the reverse split and the third-quarter results leading to a rally in shares, a short squeeze ensued, adding strength to the rally that was already in place.

On Monday, the stock jumped an incremental 53%.

The strong gains over the two sessions have apparently triggered some bargain hunting, sending the stock lower Tuesday.

Aurora's Path Forward Strewn With Risks

The macroeconomic pushback in the wake of the pandemic is likely to act as an impediment to Aurora's plans to return to positive EBITDA by the first quarter of 2021.

"With an uncertain revenue outlook, we don't yet have enough confidence in cost-cutting measures to rely on their 1Q'21 positive adjusted EBITDA goal," said MKM Partners analyst William Kirk, according to MarketWatch. 

The analyst also said Aurora is growing more cannabis than it can sell and will therefore be forced to write-down the unsold inventory.

Aurora's domestic Canadian supply is likely to outstrip demand by a factor of five by late 2020, CIBC's Zamparo said. The analyst also pointed to the company's unclear CBD strategy, a lack of strategic partnerships and balance sheet challenges as risks going forward. Aurora's balance sheet carries more debt than most peers.

At last check, Aurora shares were slipping 13.63% to $14.70 Tuesday.

Photo courtesy of Aurora Cannabis.