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Why This Canadian Marijuana Stock Is Smoking Hot Right Now

So far in 2017, shares of Aurora Cannabis (NASDAQOTH: ACBFF) are up more than 170%. Seventy percent of that gain came in the past five days. The Canadian marijuana stock jumped 27% on Monday.

There's no question that Aurora Cannabis is smoking hot right now. But what has lit a fire beneath this marijuana stock that's sent it soaring more than its rivals? There are multiple factors at play.

Image source: Getty Images.

Higher expectations

The big news on Monday was that a major Wall Street analyst increased its price target for Aurora Cannabis stock. Canaccord Genuity raised its one-year target for the stock from $3.65 to $4.45 (all values in Canadian dollars). That big boost came on the heels of another boost by Canaccord Genuity less than two weeks ago, when the firm increased its target price for Aurora from $3.25 to $3.65.

What's going on? For one thing, Canaccord Genuity sort of found itself behind the 8-ball. Aurora Cannabis stock climbed so much that it met the company's earlier price target within a matter of days rather than months. In fact, Aurora's share price is already well above Canaccord Genuity's latest price target.

Earlier this year, Canaccord Genuity handled a private placement of convertible debentures for Aurora. The net proceeds from the deal are helping the company finance its international expansion plans. Convertible debentures are a kind of loan that can be converted into stock. Debenture holders certainly would like for the stock of the company to which they're giving a loan to go higher, because the conversion to stock could make them a lot of money. Canaccord Genuity also recently led a syndicate of underwriters in a private placement of Aurora Cannabis stock. 

Some might argue that Canaccord Genuity is predisposed toward an optimistic outlook on Aurora Cannabis' prospects because of the two companies' close relationship. However, you don't have to be a conspiracy theorist to appreciate why investment firms could hold great expectations for Aurora.

Growing and growing

But why should Canaccord Genuity and others be more optimistic now about Aurora Cannabis than they have been? One reason is that the company's current sales are growing like a weed (pun fully intended). Last week, Aurora reported year-over-year revenue growth in its fiscal 2018 first quarter of 39%. 

Not only did Aurora report an increase of nearly 18% in patients in the first quarter, but it also was able to sell its medical marijuana at an average price per gram more than 10% higher than in the prior-year period. More customers with higher selling prices always works out to good news on the top line. 

The only real negative in Aurora's quarterly update came from another area of growth -- its share count. Because of the financing deals it's been doing, with Canaccord Genuity leading the charge, Aurora Cannabis' weighted average of number of shares outstanding jumped from 183.6 million shares at the end of fiscal year 2016 to nearly 376.2 million shares at the end of fiscal year 2017. That's a hefty dose of dilution for shareholders. 

Aside from the financial stats, Aurora Cannabis is set to grow significantly more in the months ahead -- literally. The company recently received a cultivation license for its indoor production facility in Quebec. The site, dubbed Aurora Vie, has a projected capacity of around 4,000 kg of cannabis per year. 

Legalization looking real now

Probably the biggest factor behind the sizzle for Aurora Cannabis is the coming legalization of recreational marijuana in Canada. On Friday of last week, the Canadian government proposed a tax of $1 (in Canadian dollars) per gram on recreational weed. It's not the amount of the tax that's important; instead, it's the fact that specific numbers on taxes underscores that legalization of recreational marijuana is on the way to becoming a reality in the country.

Another affirmation of the march toward legalization came from a different source. On Oct. 30, major alcoholic-beverage maker Constellation Brands (NYSE: STZ) announced that it was buying a 9.9% stake in Canopy Growth Corporation (NASDAQOTH: TWMJF), which, like Aurora, is currently a medical-marijuana grower in Canada. 

While this deal obviously helped Canopy Growth significantly, it was also good news for Aurora. The fact that Constellation was willing to shell out $245 million to buy a minority interest in one of its competitors could bode well for Aurora if it chooses to sell a stake to another large company. 

There are several really good things going for Aurora Cannabis right now. However, investors should keep in mind that the marijuana stock's smoking hot performance lately also means that it has a hot-to-the-touch valuation. Thanks to the huge stock gains in the last few days, Aurora now trades at 131 times sales. If the company doesn't deliver on the enormous growth expectations, investors could get burned.

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Keith Speights 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.