Aurora Cannabis Inc (ACB)

[Rule_62]

There's a lot of chatter about share price. To the point of distraction.

Let's say you invest $1000 into company A at a price of $10/share. Your original purchase is 100 shares. Let's say there are 100M shares outstanding, for a total market cap of $1B

Let's say you invest $1000 into company B at a price of $5/share. Your original purchase is 200 shares. Let's say there are 200M shares outstanding, for a total market cap of $1B

Let's say you invest $1000 into company C at a price of $2/share. Your original purchase is 500 shares. Let's say there are 500M shares outstanding, for a total market cap of $1B

Each company increases in value by 25%. Which investment earns you the most money?

Dilution is one method of raising capital to expand a growth company. It certainly has it's advantages and disadvantages. One advantage is it avoids the alternative of taking on a large debt load, which will need to be serviced from future profits (or worse, drain precious capital while the company executes it's growth plan).

Let's say Company A increases it's outstanding share count by 10M shares.
Let's say Company B increases it's outstanding share count by 20M shares.
Let's say Company C increases it's outstanding share count by 50M shares.
In which investment was the dilution of your investment the greatest?

Aurora is certainly not alone in terms of utilizing ongoing dilution to fund growth. Here's what Canopy Growth has been up to (closing share price for corresponding date shown in brackets):

June 30 2014: 37.647M (2.93)
June 30 2015: 50.875M (1.92)
June 30 2016: 103.664M (2.75)
June 30 2017: 163.884M (7.97)
Sources:
June 30 2015 consolidated financial statement (page 2)
June 30 2016 consolidated financial statement (page 3)
June 30 2017 consolidated financial statement (page 2)
Yahoo Finance

Here's what Aurora was up to during the same period:

June 30 2014: 16.146M (0.14)
June 30 2015: 76.936M ($0.30)
June 30 2016: 128.988M ($0.47)
June 30 2017: 279.029M ($2.16)
Sources:
June 30 2015 consolidated financial statement (page 2)
June 30 2016 consolidated financial statement (page 2)
June 30 2017 consolidated financial statement (page 2)


Rather than discuss the number of shares, why not look at what Aurora is doing with the funds they raise. Are they building future earnings potential? Or is the money being frittered away to support a business model with no potential to develop into a profitable company in the near to mid-term? In other words, are the effects of shareholder dilution being positively offset by the ongoing implementation of their growth strategy, or is the cumulative effect of the dilution a net negative?

The main difficulty with the current share value is that many institutional investors have price thresholds, below which they will not invest in a company. $5.00 is one of those thresholds. If Aurora was concerned about attracting institutional investors that are restricted by share price, they could simply invoke a reverse split to decrease the share count/increase the share price.

In the case of a growth company like Aurora, a reverse split is not likely to have any negative repercussions on the share price. In the sense of attracting a larger institutional investor base, it would be a successful strategy. Mind you, with institutional investors come the typical games played by those investors (increased share lending, hedging, etc.). Personally, I'd be quite happy to see Aurora continue it's present course.