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Is Charlotte’s Web Holdings a Good Buy This Month?

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Charlotte’s Web Holdings (CWEB) (CWBHF) stock is currently down 23.64% year-to-date on US OTC (over-the-counter) exchanges. Since May 31, the cannabis stock has fallen 37.36% on the TSE (Toronto Stock Exchange). On December 16, the stock was 66.41% below its 52-week high of $25.25 on US OTC exchanges. The stock fell by 12.85% from $9.73 on November 29 to $8.48 on December 16. CWEB also closed 62.79% lower than its 52-week high of 30.10 Canadian dollars on the TSE.

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FDA warning about CBD products has affected investor sentiment

On November 25, the FDA issued a warning to 15 companies involved in the sale of CBD products for violating the Federal Food, Drug, and Cosmetic Act. The agency also raised concerns about potential adverse events associated with CBD consumption. The FDA’s listed side effects included mild ones such as drowsiness and mood fluctuations and severe ones such as liver injury. This news is a recent addition to the already long list of the cannabis sector’s woes.

According to MarketWatch, US multistate operator Charlotte’s Web Holdings is one of the largest publicly traded CBD focused companies. The company is a leading CBD player by market share and has around 9,000 retail locations. The company produced 675,000 pounds of hemp in 2018 and has planted 862 acres of hemp this year. In this backdrop, the FDA not recognizing CBD as safe for human or animal consumption has affected overall investor sentiment for CWBHF.

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Missed analysts’ revenue and earnings estimates in the latest earnings season

In the third quarter, Charlotte’s Web’s revenue of $25.05 million was lower than analysts’ estimate of $32.5 million. The company also reported a loss of $0.01 per share, missing analysts’ forecast of a profit of $0.05 per share.

CWBHF had expected the FDA to set a regulatory framework for CBD products in the FDM (food, drug, and mass) channel in the third quarter. Based on this projection, the company expected significantly higher revenue in the second half of fiscal 2019. Although the FDA guidance has not yet materialized, the company has continued to expand its capabilities and target growth opportunities in the FDM channel. Furthermore, the company is investing in cultivation and consumer packaged goods infrastructure to support its fiscal 2020 revenue growth. These investments pushed up CWBHF’s operating expenses to 78.1% of its revenue.

However, in its third-quarter earnings call, CWBHF said it expects its new production facility to come online in phases in 2020. This facility could help contain costs, thereby boosting margins in the second half of fiscal 2020. The company also plans to control its expansion costs in the FDM channel. It aims to capture a disproportionate share of the CBD-based FDM market once the FDA announces its regulatory framework. The company is also focusing on CBD-based pet products as a major growth opportunity.

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Charlotte’s Web will now face competition from Canopy Growth’s First & Free

On December 12, the largest cannabis company by market capitalization, Canopy Growth (CGC), launched its hemp-derived CBD product line, First & Free, in the US. CGC is offering soft gels, oil drops, and creams under the First & Free brand. As reported by BNN Bloomberg, these products will be commercially available in 31 US states where CBD products are legal. Although CGC isn’t a big CBD player now, it could become strong competition for Charlotte’s Web in future quarters.

How Wall Street is pricing Charlotte’s Web Holdings

For the ten analysts covering Charlotte’s Web stock on the TSE on December 17, the average recommendation is “buy.” Their target price of 21.16 Canadian dollars implies an 88.93% upside from its last closing price. In November, nine analysts were covering Charlotte’s Web stock. Their average target price then was 21.72 Canadian dollars.

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How prominent analysts rate Charlotte’s Web Holdings

On December 9, as reported by TheFly, Compass Point analyst Rommel Dionisio rated Charlotte’s Web as “buy” and gave it a target price of $12. He believes that the FDA’s delay in setting regulations for CBD-based edibles and beverages has proven detrimental for the company. Despite these pressures, he believes that the company can successfully leverage its brand strength in the CBD space. The analyst expects Charlotte’s Web to benefit significantly from the anticipated growth of the overall CBD market.

On November 7, as reported by TheFly, Cantor Fitzgerald analyst Pablo Zuanic initiated coverage of Charlotte’s Web with a “neutral” rating and target price of $14.50. He also initiated coverage for consumer CBD stocks CV Sciences (CVSI) and cbdMD (YCBD) with “overweight” and “neutral” ratings, respectively, and target prices of $4.20 and $3.40. Zuanic also raised concerns about the delay in FDA guidelines for CBD products. However, he sees rapid growth in the overall CBD market and the adoption of these products by big-box retailers as key positives for the industry. He believes these trends will significantly benefit established CBD brands.

On September 25, as reported by TheFly, Piper Jaffray analyst Michael Lavery recommended “buy” for CV Sciences and Charlotte’s Web, ahead of FDA guidelines for CBD products. He believed that the FDA regulatory framework for permissible CBD products would be a big catalyst for these companies. He also expected smaller steps in the FDA’s final decision to be minor growth drivers for these stocks and highlighted the possibility of these stocks being uplisted on the Nasdaq or NYSE.

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