Headquartered in Kanata, Canada, HEXO Corp. (HEXO - Get Rating) sells adult-use and medical cannabis products and cannabis beverages in Canada. The stock has gained 124.3% over the past year, due primarily to the rapid expansion of the cannabidiol (CBD) market. However, HEXO has lost 3.6% over the past month.

In fact, HEXO’s stock is currently trading 43.9% below its 52-week high of $11.04, indicating short-term bearishness. The company’s latest earnings results, which reported an almost $21million net loss and a significant operational loss, have contributed to this downtrend.

Furthermore, as HEXO’s rivals continue to grow their sales significantly, the heated battle for market share could threaten the company’s growth prospects. Thus, we expect the stock to retreat in the near term.

So, here’s what we think could influence HEXO’s performance in the near term:           

Intense Competition in the Cannabis Market

It  has been more than two years since recreational marijuana was legalized in Canada. And as big names venture into the market to produce affordable and better-quality cannabis products, competition has intensified greatly. Increasingly, as the cannabis market matures, effective sales and growth strategies could be the deciding factors in whether a cannabis operator sinks or swims. Amid this environment, HEXO has been increasing its market share by launching new CBD beverages and other premium product mixes. However, as several large businesses continue to obtain licenses to operate, HEXO could face great difficulty in increasing its revenues in the crowded cannabis space.

Zenabis Deal Has Clouded Prospects

In February, HEXO entered an arrangement with Zenabis Global Inc., a licensed cultivator of medical and recreational cannabis. Under the agreement, HEXO will acquire Zenabis for approximately C$235 million in an all-share transaction. HEXO believes the combined organization could become one of the three top producers in Canada’s cannabis market in terms of sales and allow it to access the European medical cannabis market through Zenabis’ local partners. While the move has the potential to strengthen the company’s financials in the near term, uncertainty remains regarding  whether the deal can provide long-term strategic benefits since the European market is already overcrowded with players that are better positioned.

Unimpressive Financials

Although HEXO’s net revenue increased 12% sequentially to $32.88 million in its  second fiscal quarter ended January 31, 2021, the company generated an operating loss of $6.92 million compared to a loss of $2.56 million in its  first fiscal quarter. Its net loss was  $20.84 million, compared to a net loss of $4.2 million in the previous quarter. Furthermore, the company’s EBITDA was  negative $13.96 million over this period.

Analysts Expect a Pullback

Currently trading at $6.19, the $0.75 consensus price target indicates a potential decline of 88% in the near term.

POWR Ratings Reflect Bleak Outlook

HEXO has an overall F rating, which equates to a Strong Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. Among these categories, HEXO has an F grade  for Stability. In addition, HEXO has an F grade for Quality. This is justified given the company’s poor profitability ratios. It has a C grade for Growth, which is consistent with its weak growth prospects.

HEXO is currently ranked #11 of 12 stocks in the B-rated Medical – Consumer Goods industry. In addition to the grades we’ve highlighted, one can check out HEXO’s POWR Ratings for Value, Momentum, and Sentiment here.

If you’re looking for better stocks in the Medical – Consumer Goods industry with an Overall POWR Rating of A or B, you can access them here.

Bottom Line

HEXO’s recent agreement with Zenabis and its rapid advancement in the Canadian cannabis space could help the stock increase its market share. However, the company’s weak financials could make it difficult for the company to thrive in a highly competitive market and sustain its growth. As such, we think investors should avoid the stock now.

HEXO shares were trading at $6.30 per share on Thursday morning, up $0.11 (+1.78%). Year-to-date, HEXO has gained 71.20%, versus a 9.40% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

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