Has HEXO Stock Bottomed Out?

On January 10, HEXO (TSE:HEXO) was trading at 1.74 Canadian dollars, a fall of 63.1% since the beginning of 2019. The company was also trading at a discount of 84.6% to its 52-week high of 11.29 Canadian dollars and at a premium of 7.4% to its 52-week low of 1.62 Canadian dollars. Its weak fiscal 2020 first-quarter earnings, its withdrawal of its fiscal 2020 guidance, the sudden resignation of its CFO, and the weakness in the marijuana sector appear to have led to a fall in the company’s stock price.

HEXO has underperformed its peers and cannabis ETFs. Since the beginning of 2019, peers Canopy Growth (NYSE:CGC), Aphria (NYSE:APHA), and Cronos Group (NASDAQ:CRON) have fallen 25.7%, 17.6%, and 38.2%, respectively, as of January 10. The ETFMG Alternative Harvest ETF (NYSE:MJ) has also lost 34.1% of its value in the period.

Given such a steep fall, has HEXO’s stock price bottomed out? First, let’s look at analysts’ expectations for fiscal 2020 and fiscal 2021.

For fiscal 2020, analysts expect HEXO to report revenue of 81.2 million Canadian dollars, growth of 70.7% from 47.5 million Canadian dollars in fiscal 2019. They also expect the company’s revenue to rise 108.5% in fiscal 2020 to 169.2 million Canadian dollars. I believe the introduction of Cannabis 2.0 products and Original Stash (a value brand) and initiatives taken by Canadian provincial governments will result in a higher number of stores to drive the company’s revenue.

HEXO is planning to introduce its marijuana-infused beverages in the first half of 2020. During its first-quarter earnings call, the company announced that it was working on launching THC, CBD, and combined THC/CBD beverages in a variety of flavors under several brands. Due to the recent vaping crisis, the company has adopted a robust product development protocol. It includes clinical testing, the implementation of good production practices, and pharmaceutical-grade reference material producers. For the edibles category, HEXO announced that it was conducting test runs and preparing the market for the launch.

In November 2019, HEXO launched Original Stash. The company stated that it had priced the product close to the black market price to pull customers away from illicit businesses.

For fiscal 2020, analysts expect HEXO to report EBITDA of -57.2 million, an improvement from -64.1 million Canadian dollars in fiscal 2019. I believe HEXO’s cost-control measures and the introduction of higher-margin Cannabis 2.0 products will drive its EBITDA. However, pricing pressures due to excess supply and investments on the introduction of Cannabis 2.0 products could offset some of these improvements. For fiscal 2020, analysts expect HEXO to make a significant improvement. They expect the company to report EBITDA of -1.95 million Canadian dollars.

Of the 15 analysts that follow HEXO, only three are favoring “buy” ratings on the stock. Of the remaining 12 analysts, six have given it “hold” ratings, and six have given it “sell” ratings. As of January 10, analysts’ consensus price target stood at 2.83 Canadian dollars, implying a 12-month return potential of 10.1%. Earlier this month, Jefferies lowered its price target on the stock from 3.80 Canadian dollars to 1.90 Canadian dollars.

I expect HEXO stock to see some pressure in the near term due to the supply-demand mismatch of cannabis products and the fear of dilution from its recent stock offering. However, the introduction of Cannabis 2.0 products, the opening of more stores in Ontario and Quebec, and the company’s cost-control initiatives could drive its stock.