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Analyst Downgrade Weighs on Aurora Cannabis Stock

Eric Volkman, The Motley Fool

Aurora Cannabis (NYSE: ACB) ended Friday down more than peer marijuana stocks, as the market digested news of an analyst downgrade.

Yesterday, it was reported that Bank of America Merrill Lynch analyst Christopher Carey cut his recommendation on Aurora to neutral from buy. Although he still finds things to admire about the company, he expressed concern in a note to the bank's clients that Aurora "is burning cash and by our estimates could be cash negative by first quarter 2020."

A marijuana leaf on top of a dollar bill.

Image source: Getty Images.

The analyst pointed out that in that quarter, a large convertible bond will come due for the company. This will have a sharp impact on Aurora's relatively thin cash position.

Drawing funds from stock issuance might not be a lever Aurora can continue to pull. Over the space of only a few years, the company's shares outstanding count has ballooned to over 1 billion. A company that habitually issues stock risks alienating shareholders worried about dilution.

Merrill Lynch is one of the more influential investment banks on the scene, so the opinions of their analysts often carry a lot of weight with institutional and individual investors. In addition to this, marijuana stocks have generally enjoyed a good run in 2019 -- even with the share price slip post-downgrade, Aurora is still up by nearly 38% so far this year.

Perhaps one reason is that, as Carey expressed, there are still reasons to be positive about the company.

In fact, one happy piece of news was announced just prior to the Merrill recommendation cut: the company's victory in a tender conducted by the Italian government to supply medical cannabis in the country. Aurora was one of five suppliers bidding in the tender, and it was chosen as the sole winner.

The company, which had already been feeding the Italian medical cannabis market since January 2018, will supply at least 400 kilos of product under the conditions of the tender. Aurora has ambitions to become a top medical marijuana player throughout the world, and this tender victory is one piece of that puzzle.

Still, it's tough for any stock when a bullish outlook from an influential analyst starts looking bearish.

Aurora has not yet officially responded to Merrill Lynch's downgrade.

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Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.