With many cannabis stocks at sky-high valuations, there’s little room for making mistakes. Just look at Hexo (NYSEAmerican:HEXO). On news of its latest earnings report, the stock price dropped 8.53%. Note that the HEXO stock price is about 50% off its 52-week high.
So let’s drill-down on the quarter. For the bottom line, the company actually beat expectations. HEXO reported a loss of 7.75 million CAD ($5.77 million) , or 4 cents a share, while the consensus was for a loss of 5 cents a share.
But the top-line was another story. Revenue came in at 13.02 million CAD yet the Street was looking for a more robust 14.8 million CAD. What’s more, there was an 8.6% quarter-over-quarter drop in sales.
Now predicting quarterly numbers has not been easy as Canada is still in the early phases of legalization for recreational purposes. There are also ongoing shortages, supply complications and regulatory issues to deal with.
But then again, investors are certainly baking in lots of growth. So it should be no surprise that HEXO stock took at hit.
Here are some other worrisome metrics for the quarter:
- The average price of adult-use dried grams dropped from $5.83 CAD in January to $5.29 CAD in April.
- The average gross selling price per gram was also soft, going from $9.15 CAD to $9.11 CAD.
But of course, there was also some good news in the report. The company announced it received a medical cannabis installation license from the Greek government for “cultivation, processing and manufacturing facilities.”
To this end, Hexo plans to begin construction of a 323,000 square-foot facility in the country by the fourth quarter of this year. No doubt, this should ultimately be a nice catalyst for long-term growth.
In the meantime, Hexo has other promising initiatives. For example, the company has entered a partnership with Molson Coors (NYSE:TAP) to develop cannabis-infused beverages. There are also aggressive plans to benefit from the cannabidiol (CBD) market (this involves the use of compounds in the cannabis sativa plant that do not produce a high).
With the passage of the U.S. farm bill last year, the category is likely to see a spike in growth in the coming years. According to research from the Brightfield Group, the market in the U.S. could hit $22 billion by 2022.
Bottom Line on Hexo Stock
According to InvestorPlace’s James Brumley, Hexo stock has been mostly overlooked — say compared to names like Canopy Growth (NYSE:CGC), Tilray (NASDAQ:TLRY), Aurora Cannabis (NYSE:ACB) and Cronos Group (NASDAQ:CRON). I agree.
I also think this presents an opportunity for investors. Consider that Bank of America (NYSE:BAC) analyst Christopher Carey holds that Hexo stock has the most attractive valuation within his coverage universe. The price target is actually $10, which assumes a whopping 78% upside from current levels!
Hexo’s management is also not backing off its revenue estimates. They not only call for a doubling in the current quarter but $400 million CAD for fiscal year 2020, which does not include the impact from the Molson Coors’s partnership.
Now when it comes to cannabis stocks, there should always be caution. Again, the industry is in the early stages and there will likely be continued volatility. Let’s face it, the competitive environment is getting more intense and the legal environment is far from certain.
So yes, investors should be diligent with their money. But as for Hexo stock, there are certainly many positives, in terms of the global expansion, CBD opportunity and the growth in Canada.
Tom Taulli is the author of the upcoming book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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