Hexo (NYSE:HEXO) reported third-quarter earnings Thursday before the bell. The Quebec-based cannabis company’s revenues missed analysts’ estimate by a wide margin and even declined versus Q2, causing HEXO stock to plunge on both Thursday and Friday.
Still, while this report might have scared investors, it does not appear to have affected the overall trajectory of Hexo Corp.
HEXO Fell on a Massive Revenue Miss
The HEXO stock price fell by another 5% on Friday. That came on top of an 8.5% decline on Thursday, as the fallout from the sequential revenue decline sent HEXO stock price plunging.
For Q3, analysts, on average, had expected a loss of 5 cents per share. The company reported a loss of 4 cents per share, coming in ahead of estimates. However, its revenue of C$13 million was well short of the C$14.8 million analysts, on average, had expected.
But HEXO’s sales soared more than tenfold from the C$1.2 million of revenue it reported in the same quarter a year earlier. However, its $400,000 sequential revenue decline may have further dampened traders’ view on HEXO stock.
HEXO Is Still Poised for Robust Growth
Up to this point, HEXO had begun to develop a reputation as a sleeper play in this industry. It does not garner the attention that is devoted to Canopy Growth (NYSE:CGC), Aurora Cannabis (NYSE:ACB), Tilray (NASDAQ:TLRY), or Cronos Group (NASDAQ:CRON).
However, its home province of Quebec is Canada’s second-largest. In this province of about 8.4 million people, HEXO controls more than 30% of the cannabis market. It has been able to be so successful in large part because of a supply deal it made to bring 200,000 kg of cannabis to the province over five years.
Meanwhile, HEXO recently agreed to buy Newstrike Brands (OTCMKTS:NWKRF). The deal increases HEXO’s production space by 470,000 sf. That gives the company enough capacity to produce 150,000 kg of cannabis per year. HEXO also wants to enter the edibles and beverage markets. In the beverage space, it has partnered with Molson Coors (NYSE:TAP).
On top of that, though analysts expect HEXO to post a 17 cent per share loss this year, they expect its EPS to rise to positive 11 cents next year. Also, notwithstanding the quarterly report, its revenues appear robust. The company only brought in C$4.93 million last year. However, for fiscal 2019, analysts’ consensus revenue estimates rise to C$62.62 million. In 2020, analysts expect its revenue to reach C$319.4 million. This triple-digit growth may turn Thursday’s results into an anomaly Wall Street will soon forget.
Should Investors Buy HEXO Stock?
In fairness, most of HEXO’s marijuana stock peers also sold off on the news. Hexo’s report could have left many with second thoughts about the industry’s lofty valuations. Still, I see the decline of HEXO stock price as an overreaction. Its sequential revenue decline does nothing to undermine the longer-term case for HEXO stock.
For this reason, I think investors should still be bullish on HEXO. Its revenue decline might have blindsided Wall Street. However, by focusing on that revenue number, investors apparently ignored an acquisition that will dramatically increase both the company’s production capacity and its reach in its home country.
Moreover, HEXO has attracted an ally in Molson Coors that can give the company the financial muscle and marketing knowledge it needs to launch cannabis-based beverages. Additionally, its lucrative supply agreement in its home province has bolstered its position in edibles and other markets. Given its growth potential, investors should add to their positions in HEXO, instead of selling HEXO stock.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.