As with most cannabis companies in the current correction, Charlotte’s Web Holdings (CWBHF) has taken a big hit as sentiment for the sector remains negative.
It's debatable how long the industry will remain down, but once it bottoms out, it's obvious that the stronger cannabis companies will rebound nicely, and those willing to endure the current volatility in the cannabis sector will be rewarded with solid returns once the bottom is reached.
Those companies that have positioned themselves for long-term growth within the specific segment of the cannabis market they compete in, such as Charlotte’s Web Holdings has in the CBD market, they should get the biggest boost from the market rebound that will inevitably come.
In this article we'll look at why it's only a matter of time before Charlotte’s Web Holdings enjoys a strong recovery, and what the key catalysts will be.
The key thing going forward with Charlotte’s Web is for investors to manage expectations. What has driven market sentiment negative concerning the cannabis industry has been the market's reaction to what is considered disappointing performances, when in reality it was inevitable that the high-flying cannabis sector went through a season of correction after soaring for a prolonged period of time.
After exploding with huge multiples in the early stage of growth, companies are now settling down into a more reasonable growth trajectory, which while still being significant, will be much more subdued than in the past.
This is why the last earnings report for Charlotte’s Web resulted in overreaction from the market, even though the company produced decent numbers.
While missing on revenue by $2.78 million and earnings per share by $0.03, that was primarily because expectations were still so high, at a time when the company was entering into a more mature state of growth.
A sign that its growth was starting to become more realistic was the fact it year-over-year growth was up only 45 percent to $25 million. Normally that would be a solid number, but when measured against some of its peers, it was fairly modest.
On the other hand, the company generated a gross margin of 75 percent, which produced $18.8 million in gross profits.
Another factor that could boost results is that the company increased the number of retail outlets it sold out of by 1926, finishing the quarter at 7871. The current quarter will give a better view of the impact on the company because it'll include a full quarter of results.
The major growth catalyst for Charlotte’s Web is the CBD segment, which is projected to soar to $23.7 billion in annual sales by 2023, according to the Brightfield Group.
If the company is able to maintain its current market lead, it's going to account for long-term for many years. As competition heats up it may lose some of that share, but taking into account the expected growth in CBD, even a decline in market share would likely result in a significant increase in sales.
On the production side of the business, it increased the amount of acreage planted for 2019 by 862 acres, up 187 percent year-over-year.
Other catalysts include the release of a new pet line in the last quarter, which at the time had twelve new SKU's. The company also has signed distribution deals with Krogers and CVS Health. It also launched a new line of CBD gummies with three SKU's.
Concerning gummies, in the latter part of September 2019 it announced it was now selling its gummies via The Vitamin Shoppe, a specialty retailer of nutritional products. It was already selling extract oil tinctures and liquid capsules. The deal will provide a more comprehensive product line for consumers while increasing sales.
The CBD gummies will be sold in 738 The Vitamin Shoppe stores in 45 states.
Overall, the cannabis company remains a Wall Street darling, as TipRanks analytics showcasing Charlotte’s Web as a Strong Buy. With an average price target of $23.31, analysts are predicting massive upside potential of nearly 80% for the stock. In total, Charlotte’s Web has received 3 'buy' ratings in the last three months. (See Charlotte’s Web price targets and analyst ratings on TipRanks)
Even though the cannabis sector is in a temporary lull, there is no doubt it's going to rebound once the current correction reaches a floor. Since nothing has changed in relationship to the growth of the cannabis sector, those companies like Charlotte’s Web that are positioned for this ongoing growth, are going to do very well over the long term.
There is going to be a lot of competition coming in the CBD segment of the market, so the level of market share Charlotte’s Web is able to retain and/or grow, will determine its performance going forward.
As mentioned earlier, the company could realistically lose some market share while still growing revenue and earnings because of the soaring demand for CBD products.
I'm not suggesting Charlotte’s Web will lose market share, only that it's possible as an increasing number of competitors enter the market. My point is that even if it loses some share, it probably won't have an impact on the company's growth through 2023.
On the other hand, if it's able to maintain and grow share, the upside of its market value is going to vastly exceed expectations.
The long-term future of Charlotte’s Web looks very bright, and for patient investors it should generate solid returns for them, based upon the catalysts now in play.
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