So far this year, HEXO (HEXO) has lost 55.4% of its stock value as of December 27. The company has underperformed its peers and the broader equity market. During the same period, Canopy Growth (CGC) (WEED), Aphria (APHA), and Cronos Group (CRON) have fallen by 31.4%, 18.7%, and 37.6%, respectively. Meanwhile, the S&P 500 Index has increased by 29.2% YTD. The weak performance in the last two quarters, the withdrawal of HEXO’s fiscal 2020 guidance, the abrupt resignation of its CFO, and weakness in the cannabis sector caused the stock price to fall. Can Cannabis 2.0 products drive HEXO’s stock price?
HEXO’s upcoming Cannabis 2.0 products
With Canada legalizing the sale of Cannabis 2.0 products, HEXO is working to bring new products to the Canadian market. The company has been investing in technology and developing intellectual properties. By the end of the fourth quarter, the company filed 38 patents.
In partnership with Molson Coors, HEXO plans to launch cannabis-infused beverages in the first half of 2020. Notably, the company will introduce THC, CBD, and minor cannabinoid beverage products in a variety of flavors.
Regarding vape products, HEXO has adopted a development protocol due to the recent vaping-related deaths. The protocol includes clinical testing, good practices, and pharmaceutical-grade R&D. The company announced that its vape products will be free from thinning agents, like PG and VG, which could impact consumers’ health. For edibles, the company plans to conduct test runs. HEXO is producing the products from its Gatineau pilot facility to conduct the test runs. HEXO is also constructing the second phase of its Belleville facility, which will only produce Cannabis 2.0 products.
HEXO’s management said that it made significant progress in developing its emulsion technology and other platform technologies. Overall, the company expects the technologies to help in developing innovative products. HEXO plans to sell these technologies to other consumer companies or partner with them in developing cannabis derivative products.
Recently, Canopy Growth and Aurora Cannabis provided an update on their upcoming Cannabis 2.0 products. To learn more, read A Look at Canopy Growth’s Cannabis 2.0 Portfolio and Aurora Cannabis Releases Update on Cannabis 2.0.
Analysts expect HEXO to report revenues of 79.5 million Canadian dollars, which implies a YoY growth of 67.2%. In addition, they expect the company’s revenues to rise 112.2% to 168.7 million Canadian dollars in fiscal 2020. Analysts expect HEXO to become profitable in the second quarter of fiscal 2021. They project the company to report a negative EBITDA of 55.8 million in fiscal 2020. Meanwhile, for fiscal 2021, they expect HEXO to report an EBITDA of 0.4 million Canadian dollars.
Despite the near-term challenges, like excess supply and pricing pressure, we expect Cannabis 2.0 products to act as a catalyst for HEXO and the entire cannabis sector in fiscal 2020. Due to differentiation, HEXO can command higher prices for its Cannabis 2.0 products. The higher prices and the company’s initiatives to cut down on its G&A (general and administrative) expenses could improve its profitability. Also, HEXO introduced a value brand, “Original Stash,” which is priced at the illicit market price. Original Stash could drive the company’s sales.
Analysts have mixed opinions about HEXO. Among the 15 analysts, 40% favor a “hold” rating, 40% favor a “sell” rating, and 20% favor a “buy” rating. Analysts’ consensus target price stands at 2.83 Canadian dollars with a return potential of 25.8%.
For more cannabis-related news and updates, visit 420 Investor Daily.