The past couple years have been challenging for HEXO (NYSE:HEXO). HEXO stock has gone from a high $7.82 to a low of 35 cents a share.
But lately, things have been perking up. Since late October, the shares have gone 60 cents a share to $1.05.
In fact, today the stock got an extra boost on news of its latest earnings report. The market capitalization is now roughly $504 million.
In the quarter, the revenues spiked by 114% to $41.3 million and was up 14% on a sequential basis. This is the highest level in the company’s history. There was strength across key markets in Alberta, Ontario and British Columbia. The company was also able to keep its No. 1 market position in Quebec.
The adjusted EBITDA improved by 87% on a quarter-over-basis to -$420,000 and the adjusted gross margin was 39%. The company currently has about $149.8 million in the bank and working capital of $250.3 million.
Here are some of the key highlights for the quarter:
- The company launched its Truss Beverage bottling facility, which will be a big driver for growth.
- For the UP Cannabis brand, the company increased the THC content by at least 20% for its line of products. This is likely to be a key differentiator. Note that the brand saw a positive impact in the quarter.
- HEXO announced that Trent MacDonald passed the security clearance under the Cannabis Act. As a result, he is now the permanent Chief Financial Officer of the company.
- HEXO reached a settlement with Assi Project Management, which was alleged to have infringed on a trademark for CBD products.
A Closer Look at Hexo Stock
Not long ago, the situation for HEXO stock looked particularly bleak. The Canadian market was not growing as fast as expected and the company was running low on cash. There was also competition from black market operators.
But management was swift to take tough actions. There were various write-downs of failed acquisitions and aggressive cost cutting. And because of these actions, the company will likely soon reach positive EBITDA and cash flows.
There are also positives in terms of the regulations on cannabis. The U.S. election definitely highlighted this. Joe Biden’s election could lead to a loosening of restrictions. What’s more, there was the passage of various state propositions that were favorable to cannabis sales and usage.
True, HEXO is primarily focused on the Canadian market. But in the years ahead, the company should be able to capitalize on the opportunity in the U.S.
Yet the big driver is the strategic partnership with Molson Coors Beverage (NYSE:TAP). Through this arrangement, HEXO has been able to leverage the extensive distribution footprint and marketing resources. Keep in mind that the company is now the leader in Canada for cannabis beverages.
Now there are still risks with HEXO stock. After all, it is still a penny stock. This means that there is not as much institutional coverage, whether from investors or analysts.
Next, unlike other major cannabis companies like Cronos (NASDAQ:CRON) and Canopy Growth (NASDAQ:CGC), the financial situation is still somewhat vulnerable. If there is another downturn in the Canadian market, HEXO will certainly feel lots of pressure.
Yet this scenario does look unlikely for now. If anything, HEXO is likely to continue to see traction with its partnership with Molson Coors. Note that the relationship is still in the early stages. More important, Molson Coors is looking for ways to gain a foothold in the cannabis market.
For investors who can stomach the price swings and are willing to take a long-term view of things, HEXO does look interesting.
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the author of courses on topics like the Python language and COBOL.