Cannabis Stock: Will Hexo Get Delisted Next?

Hexo (TSE:HEXO) has been struggling for a while now. The string of bad news started in October 2019 when CFO Michael Monahan resigned. Since then, the company’s earnings results haven’t impressed investors. The company’s bleak outlook for 2020 also pulled the stock down. Hexo stock had been hovering around $1. Cannabis stocks have fallen hard due to the recent market turmoil amid the coronavirus scare and declining oil prices. Hexo went below $1, which put it at risk of delisting from the exchange along with a few other cannabis stocks.

Marijuana stocks soared in 2018 after Canada legalized recreational cannabis. However, 2019 was disastrous for cannabis companies and their stocks. Most of the companies have lost a considerable amount of their stock value. Hexo stock lost 70% in 2019. Hexo was one of the first cannabis stocks to be listed on a major stock exchange. Now, the stock might get delisted from the exchange.

Hexo disappointed investors with its first-quarter earnings. The company missed analysts’ revenue estimates of 15.6 million Canadian dollars and reported 14.5 million Canadian dollars. The EBITDA loss was higher at 24.6 million Canadian dollars compared to analysts’ estimate of a 21.4 million Canadian dollar loss.

Aurora Cannabis (NYSE:ACB) and Sundial Growers are in the same boat. Both of the stocks have fallen below $1, which increases their chances of delisting. Aurora Cannabis stock has fallen 60% YTD and is trading at $0.70. The stock declined by 18.4% on Thursday, while Sundial fell 11.0%. Canopy Growth (NYSE:CGC)(TSE:WEED) and Cronos Group (NASDAQ:CRON) fell 18.2% and 16.4% on Thursday.

In Aurora Cannabis Falls 60% in 2020, Might Get Delisted, I discussed how a company trading below $1 has one month to get it shares up before it receives a warning letter from the stock exchange.

Usually, the exchange sends a warning letter to the company to provide a plan of action on how to get its shares back on track. Among the cannabis companies, only CannTrust got a warning letter. However, the company’s issues were different. For Hexo, Canada’s supply issue and a rise in black market sales pulled down the company’s revenue and profitability. However, there’s still hope. The company could still pull back if things improve in Canada. Cannabis 2.0 products have just been released into the market. The cannabis companies will still release a few more products. Canada is on track to open more legal shops to fight illegal cannabis sales. So, there’s hope for Hexo to improve its revenue and profitability.

The company could report its results for the second quarter of fiscal 2020 this month. Analysts expect Hexo’s revenue to rise by 25% YoY (year-over-year) to 16.8 million Canadian dollars. Sequentially, the expectations show a slight increase in revenue from 14.5 million Canadian dollars in the first quarter. Sequentially, the EBITDA loss could fall to 15 million Canadian dollars from 24.6 million in the first quarter. The company also stated in its first-quarter earnings call that it’s working diligently to become adjusted EBITDA positive in 2020.

Currently, analysts look bearish on Hexo. Among the 17 analysts that cover the stock, six recommend a “hold,” five recommend a “sell,” three recommend a “buy,” and three recommend a “strong sell.” The average target price on the stock is 2.35 Canadian dollars. The target price shows an upside potential of 128% from Thursday’s closing price of 1.03 Canadian dollars.

Recently, MarketWatch reported that a Stifel analyst gave a “sell” rating for Hexo with a 12-month target price of 1.15 Canadian dollars. The analyst thinks that the company’s management credibility and cash crunch will be hard to overcome. Hexo has strong exposure to Quebec. Notably, Quebec has restrictions from policymakers, which makes it difficult for the company to achieve its growth target.

Previously, I discussed how situations can change quickly in an evolving industry like marijuana. Read Are Marijuana Stocks a Good Investment in March? to learn more.