Aurora Cannabis (NASDAQ: ACB) (TSE: ACB) is up 4% this morning after falling 5% on Friday. So far we might think this is just a bit of volatility. But with the stock down 61% over the past 12 months we think that it's the downside which predominates here. We simply find it very difficult to believe that anyone's going to be able to make much money in the cannabis market. Yes, clearly, this is an odd position but one we're happy to admit to. It's the sector that's the problem, not any of the individual competitors.
Well, OK, we might amend that slightly, there are obviously some out there who have been partaking in too much of their own stock. But the opinion on the market as a whole still stands. As to Aurora: “ Aurora Cannabis Inc., together with its subsidiaries, produces, distributes, and sells cannabis and cannabis-derivative products in Canada and internationally. It operates through three segments: Canadian Cannabis, European Cannabis, and Plant Propagation.”
The first problem we see here is that there are simply too many people in the market. As legalisation proceeded there were many companies that came to market. They were able to raise substantial capital as they did so - pot was quite the fashionable thing to invest in for a time. This just does, as a consequence, mean that there are a number of (previously, at least) well funded companies in the market which makes it very difficult for any individual one to make a profit.
Aurora Cannabis share price from NASDAQOur second worry is that everyone is trying to compete in a market designed by bureaucrats. We don't have much regard for the paper pushers at the best of times but when they try to design a market even less. The standard result currently is that the illegal dope in California is better and cheaper than the legal. Which gives a good indication of how well bureaucrats can and do design markets.
But our final worry is that people trying to grow in the rich countries are, we're are really very sure about this, going to get crushed by international competition. We've said this a couple of times elsewhere. We rarely get tobacco from rich countries these days and cannabis will - in our view at least - inevitably end up the same. It'll be grown by poor people in poor places with the right climate. And it'll be cheap, cheap, cheap. Sure, taxation will make it expensive but those trying to grow it in rich countries with highly paid labour are going to suffer a lot of pain. We just don't see how rich world producers are going to be able to compete.
