cbdMD (AMEX:YCBD) soared from below $1.00 to over $2.00 last month in May 2020. The company reported a huge earnings per share beating expectations, drawing plenty of demand for YCBD stock.
Now that the stock is settling in the $1.50 range, should investors consider buying this nano cap?
cbdMD’s 40 cent earnings per share easily beat the consensus estimates by 46 cents. Revenue rose 65.8% to $9.4 million, missing expectations by $2.73 million.
Upon closer inspection of the balance sheet, investors will notice a reduction in contingent liabilities. The company posted contingent liability falling from $50.6 million last year to $7.82 million in the second quarter.
On the balance sheet, cbdMD still had goodwill of $54.70 million and intangible assets of $21.63 million. Still, investors may overlook the bloated with these figures.
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The company’s revenue rose as a result of “a significant shift in online sales as an overall percentage of net sales, with direct to consumer e-commerce online sales reporting 72% of overall sales, up from 67% from the prior quarter.”
Gross margins as a percent of net sales did not rise by much. It increased to 70.9%, compared to 66% last year.
As seen in the chart, the downtrend and subsequent trading range trends at around $1.00 for cbdMD stock ended recently.
The company improved its operating cost profile, as costs in April fell by 40%.
Outlook on YCBD Stock
cbdMD “reiterates that it expects to reach cash flow positive by the end of calendar 2020, and based on the current operating trends, expects to reach this milestone with a significant cash cushion.”
The company could conceivably meet its cash flow target if its B2B retail increases its reach. In Q2, it had over 6,300 doors worldwide, up 1,000 from last quarter.
A partnership deal with Life Time should help cbdMD’s revenue. On Sep. 25, 2019, the company signed a deal to bring CBD awareness and education.
Life Time describes itself as a company that “encompassed healthy living, healthy work, healthy entertainment, and healthy aging by providing its members with an unmatched health and wellness experience, and unparalleled, personalized programs, services, and amenities that meet the needs and interests of the entire family.”
Headwinds
In Jan. 2020, cbdMD announced a public offering that raised $18.4 million. The offering hurt existing shareholders but also increased its cash on hand. In the last quarter, its cash and cash equivalents rose to $14.84 million as of March 31, 2020. This is up from $4.69 million as of Sept. 30, 2019.
cbdMD also posted inventory growing from $4.3 million to $6.57 million in the period. If the company is unable to sell those goods, it may face a write-down, hurting its results.
cbdMD has very little coverage on Wall Street (per Tipranks). The lack of main street interest will hurt daily trading volume.
Limited Opportunity
cbdMD faces plenty of competition from other suppliers who sell on eBay (NASDAQ:EBAY) or Amazon.com (NASDAQ:AMZN). Selling a commodity product will pressure its selling price.
Plus, without a barrier to entry, the company does not have a moat. Higher operating costs will also hurt its profit potential. Still, if regulators change the rules to protect the consumer or demand for third-party testing grows, cbdMD’s revenue would soar.
On the conference call, cbd’s Chairman and co-CEO, Marty Sumichrast, said, “We continue to invest in R&D and testing to ensure the highest safety and quality for all of our products.”
Sumichrast also pointed out that “our commitment to quality was recently rewarded as we were honored in February that two of the best selling products, our CBD PM Sleep Aid and our cbdMD Free Topical voted the winner of the prestigious 2020 Product of the Year award in the Sleep Aid and CBD topical categories respectively.”
Your Takeaway
Speculators looking for a stock that may potentially double should consider cbdMD. But exercise caution: continue watching for evidence that sales are outpacing costs.
Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.
