When it comes to Canadian cannabis companies, Hexo (NYSE:HEXO) doesn’t always get the recognition it deserves. Hexo stock is often seen as the little brother to bigger players like Aurora Cannabis (NYSE:ACB) and Canopy Growth (NYSE:CGC).
But if you’re looking to get in at the ground floor with a growing cannabis company, HEXO isn’t a bad option. The company’s sales have grown by massive amounts over the last 12 months. And the company predicted its revenue will double over the next quarter.
Of course, many investors are hesitant given some of the recent uncertainty in the Canadian cannabis industry. Here are three things you need to know before investing in Hexo stock.
The Cannabis Industry Is On Unsteady Footing
There’s been a lot of volatility in the cannabis industry recently. First, there was the revelation that CannTrust (NYSE:CTST) was illegally growing marijuana in unlicensed rooms.
And most recently, Canopy Growth released an abysmal earnings report showing that the company isn’t as profitable as many investors believed. All of this has caused marijuana stocks across the board to fall.
The cannabis industry is going to be huge, but it’s still unclear which companies will be around to cash in on it. At this point, it’s impossible to predict which company will fall victim to regulatory issues or plunging sales next.
Hexo Stock Isn’t Yet Profitable
Hexo’s most recent earnings report showed that the company achieved huge growth over the past year. In the third quarter of 2018, the company’s sales were a mere CAD $1.24 million. This year, that figure came in at CAD $15.9 million.
However, like many cannabis companies, Hexo is not yet profitable. The company may have earned more during the third quarter, but it also spent a lot more money. Its total operating expenses came to CAD $24.1 million during the third quarter.
And the company is still held back by its production capacity. However, the company did open a 1-million-square-foot greenhouse in April so it will be interesting to see how that impacts the company during its Q4.
HEXO Has Long-Term Potential
Looking forward, Hexo stock does have a lot of long-term potential. The company’s sales are impressive and it currently holds a 30% market share in Quebec.
And Hexo is actively working to improve its production capacity. In March, the company announced it planned to acquire the Toronto-based Newstrike Brands. Once these facilities are fully operational this will give Hexo an additional 470,000 square feet in production space.
The company currently makes most of its revenue from recreational and medicinal marijuana sales. But its recent partnership with Molson Coors (NYSE:TAP) sets the stage for Hexo to lead the market in cannabis-infused beverages, once legalized.
My advice with Hexo is to proceed with caution. The fundamentals look promising but there are just too many unknowns going forward.
As of this writing, Jamie Johnson did not hold a position in any of the aforementioned stocks.
