Amid the massive decline of cannabis stocks in 2019, Hexo Corp. (NYSE:HEXO) is not catching a break at all. Hexo stock is hovering close to its 52-week lows.
It is also over 70% below its 52-week high reached this past April. Hexo stock faced more selling pressure recently. Its Q4 earnings report posted on Oct. 29 did not exactly draw buyers to Hexo stock. Even though its revenue came in above analysts’ average estimate, HEXO issued weak guidance for Q1 and full-year 2020. Investors need to re-evaluate Hexo stock and determine if it’s still worth buying or holding.
Q4 Net Loss
Hexo reported a net loss of C$56.69 million. Its revenue rose an impressive 992.2% year-over-year. Still, its top line came in at just C$15.4 million (US $11.70 million). Its gross cannabis revenue was C$20.5 million as its dried cannabis production grew 72% to 16,824 kg. HEXO’s average adult-use gross selling price per gram was C$4.74, down from C$5.45 in Q1. The average price of the cannabis it sold for medical purposes came in at C$8.34 per gram, versus C$9.12 in Q1.
The falling prices should alarm investors, as they indicate that intense competition in Canada hurt the company’s results.
With HEXO and other suppliers bringing manufacturing plants online, it looks as though the supply-demand dynamics are unfavorable. As a result, cannabis prices in Canada may collapse even further. And the intense competition and complicated regulations of the Canadian market hurt HEXO’s quarterly results.
On its earnings conference call, Hexo said:
“The retail store rollout in Canada has been slow to develop, particularly in Ontario and Quebec, which represents approximately 60% of the Canadian population and currently, less than 10% of the stores. While both provinces are committed to improving access to legalize cannabis, this has been slower than originally expected to develop.”
Hexo maintained 33% market share in Quebec, a positive development despite the weak quarter. This demonstrates that HEXO’s brand is strong in its home market. That asset could make a big difference in future quarters.
Meanwhile, the company continues to launch new products and will focus on attracting existing black market consumers. By targeting those who do not typically walk into stores, Hexo may be able to gain market share, boosting Hexo stock. Increasing the likelihood of Hexo accomplishing that goal is the fact that legal retail prices are in some cases lower than black-market prices.
HEXO forecast Q1 revenue of $14 million – $18 million. For 2020, it expects positive EBITDA. The company predicts that it will reach profitability without raising any cash from the capital markets. But if it needs to raise additional funds it will be able to do so easily. It raised $70 million from shareholders and insiders on Oct. 23.
Hexo’s market share in Ontario and Alberta should rise as its largest competitors’ market share growth is slowing in those provinces. HEXO is adding more stores in Quebec, indicating that its market share there will increase as well.
The Bottom Line on Hexo Stock
13 analysts covering HEXO stock have an average price target of $3.19 on Hexo stock, more than 50% above yesterday’s closing price of $2.06. If its gross margin, which was 33% in Q4, increases while its operating expenses fall sharply, expect it to be continuously profitable in 2020. Such a performance would lift Hexo stock price.
As of this writing, the author did not hold a position in any of the aforementioned securities.