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Is Charlotte’s Web Still a Good Buy?

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Overall, 2019 was tough for Charlotte’s Web Holdings (OTCMKTS:CWBHF) (NYSEARCA:CWEB). The company lost 20.6% of its stock value last year. The company missed analysts’ estimates in all three quarters of 2019. In November 2019, the FDA sent warning letters to 15 companies for violating the Federal Food, Drug, and Cosmetic Act. The company’s stock price fell due to the announcements and weakness in the cannabis sector. Charlotte’s Web Holdings’ stock price also fell due to the fear of dilution from the company’s public offering of approximately 66 million Canadian dollars in November 2019.

However, Charlotte’s Web Holdings has made a significant recovery this year. The stock has increased by 14.8% YTD as of Monday. On January 14, Collin Peterson, the House Agriculture Committee chairman, introduced the new legislation, which would include hemp-derived CBD products to be marketed under dietary supplements. The company’s stock price rose after the bill was introduced. Despite the increase in the stock price, Charlotte’s Web Holdings is trading 65.1% lower than its 52-week high of $25.25. So, is the company still a buy? First, we’ll discuss analysts’ estimates for the company in 2019 and 2020.

Analysts’ revenue expectations for Charlotte’s Web

Analysts expect Charlotte’s Web to report revenues of $27.6 million in the fourth quarter. They expect the company’s 2019 revenue to be $99.2 million, which represents a rise of 42.7% from $69.5 million in 2018. For 2020, analysts expect the company’s revenue to rise by 49.2% to $148.1 million. We expect growth in the B2B (business-to-business) segment and DTC (direct-to-customers) segment to drive the company’s revenue.

Charlotte’s Web expanded its retail footprint to over 9,000 stores by the end of the third quarter. The company’s management announced that it served only 6% of the 80,000 potential food, drug, and mass outlets in the US. So, there’s a significant scope to expand. The company is working to expand its distribution breadth across national retailers and also its portfolio depth within each retailer. In September 2019, the company announced that it would introduce its hemp-derived CBD-infused gummies in 738 Vitamin Shoppe stores across 45 states in the US. In the last quarter, the company added two pet store distributors that have access to approximately 5,000 stores.

Moving to the DTC segment, Charlotte’s Web launched a new e-commerce platform in October 2019. The platform would provide insight into customers’ behavior and interests. Along with these initiatives, expanding the cultivation and processing facilities could drive the company’s revenue.

Analysts’ EBITDA estimates

For 2019, analysts expect Charlotte’s Web to report an EBITDA of $10.0 million, which represents a fall of 52.6% from $21.1 million in 2018. For 2020, analysts expect the company to report an EBITDA of $19.4 million. They expect a decline in the company’s gross margin and higher SG&A (selling, general, and administrative) expenses to offset the effect of revenue growth and lower the company’s EBITDA.

Analysts’ recommendations for Charlotte’s Web

Analysts are bullish on Charlotte’s Web. Eight of the ten analysts recommend a “buy” rating, while two recommend a “hold” rating. None of the analysts recommend a “sell” rating. As of Monday, analysts’ consensus target price was $15.96, which represents a return potential of 81% from its stock price of $8.82 on Monday.

So far in 2020, Charlotte’s Web has outperformed the ETFMG Alternative Harvest ETF (NYSE:MJ). MJ has risen 9.5% this year as of Monday. Charlotte’s Web has also outperformed Cresco Labs (OTCMKTS:CRLBF) and MedMen Enterprises, which have returned -2.5%, and 8.4%, respectively. However, Curaleaf Holdings (OTCMKTS:CURLF) has delivered returns of 16% during the same period.

Our take on Charlotte’s Web

We expect that the legislation, which would allow the companies to market hemp-derived CBD products as dietary supplements, could act as a catalyst for Charlotte’s Web. So, we think that investors should wait until they get a clear picture on the legislation front to make a decision on the stock.

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