Since HEXO’s shares peaked in April at $11.29, it has been an extremely painful ride for shareholders. The company was supposed to report last week but the report was delayed until the October 28th and ended up getting pushed until today before the market opened. This comes after the company recently withdrew its 2020 guidance and revised revenues numbers down which sent the stock crashing.
HEXO is not the only company that has suffered, most large-cap companies in the cannabis sector have suffered severe share price declines and many investors are left wondering when the sector will bounce back.
We can try and determine the root cause of share price declines, but we feel that it was a perfect storm of factors that have brought many of these companies to their knees. First, investors just got too excited and optimistic, driving share prices to unrealistic valuations. Second, we have the recent vaping crisis that has added more negative sentiment towards the sector. Third, we have the issue of profitability and the fact that many of these companies still have a ways to go before becoming profitable.
Finally, there will eventually be a problem with oversupply and dropping cannabis prices per gram.
In HEXO’s recent quarter they reported net revenue of $15.4 million from the sale of 4,009 kilograms of cannabis. The problem was the fact that their average selling price on the recreational market was just $3.51 per gram.
While dropping prices are expected and widely recognized throughout the industry, these companies need to take this into account when providing revenue guidance to their investors especially in these market conditions. As expectations on revenue drop and investors’ expectations come back down to reality we will see which companies survive and which ones were just simply all talk with no substantial earnings.
HEXO does have a few things going for it. One could argue that it’s shares on sale at a steep discount. The company also has made efforts to focus on profitability recently, laying off around 20% of their workforce as they restructure in hopes of becoming a more efficient company. In addition, we heard some encouraging words from their CEO Sebastian St-Louis on their Tuesday morning conference call “The challenge right now is not if cannabis will be a huge industry, we know that (it will). What is less clear is which companies will survive…. I’m more confident than ever as we see the number of licensed producers dwindle drastically, we are almost certain to be one of those survivors.”
Let’s not forget that HEXO is still in a joint venture with Molson Coors and expects to roll out new products to hit the infused beverage market although this may still take some time to register substantial revenues.
HEXO and the industry have a long way to go to re-test their 52-week highs again but at these low levels, HEXO’s could be a stock investors should consider.
(Disclosure: The author owns shares of HEXO)
HEXO shares were trading at $2.27 per share on Wednesday afternoon, up $0.02 (+0.89%). Year-to-date, HEXO has declined -33.82%, versus a 22.80% rise in the benchmark S&P 500 index during the same period.
About the Author: Aaron Missere
Aaron is an experienced investor who is also the CEO of Departures Capital. His primary focus is on the cannabis industry. He also hosts a weekly show on YouTube about marijuana stocks. Learn more about Aaron’s background, along with links to his most recent articles. More...
