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Hexo Stock Faces a Storm, Will It Rebound?


Mar. 19 2020, Published 10:29 a.m. ET

Hexo (TSE:HEXO) closed with a loss of 19% on March 18. The stock started its downward trend on Tuesday. Notably, the company decided to delay its second-quarter earnings. The stock fell 41% on the NYSE and 34% on the Toronto Stock Exchange on Tuesday. The already struggling stock, which has been trading below $1 since last week’s market sell-off, is at risk of being delisted. To add to the concerns, analysts are skeptical about Hexo’s future. Many analysts have downgraded the stock and reduced its target price.

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Hexo delayed its earnings results

Hexo announced that it will delay its second-quarter results. The company stated that it has incurred an impairment loss. However, Hexo will need time to make the final calculations and conclusions due to the complexity of the losses. The losses could come up to 265 million–280 million Canadian dollars. Hexo’s downfall started last year when it withdrew its fiscal 2020 guidance. The company mentioned that the slower store roll-out and the Canadian government’s regulatory delays contributed to the impairment losses. Hexo also announced its second-quarter financial data. Read Why Did Hexo’s Stock Price Fall on Tuesday? to learn more.

Analysts are skeptical about the short-term outlook

A CanTech Letter stated that AltaCorp Capital analyst David Kideckel has a bearish outlook for Hexo stock. Altacorp downgraded the stock to “underperform” from “sector perform.” The firm also lowered the target price for the stock to $1.2 from $3.15. Kideckel said that “the current COVID-19 pandemic adds more strain to HEXO and other cannabis companies, as the potential closure of currently operating cannabis stores, “could depress sales over the near-term and worsen the demand and supply imbalance in the Canadian cannabis market, ultimately leading to higher cash burn rates.”

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There was hope that Hexo’s Cannabis 2.0 products would improve its margins and revenue growth. However, looking at the current negative conditions, analysts don’t think that the company’s outlook is certain. Hexo’s net revenue for the second quarter was 17.0 million Canadian dollars, which was above analysts’ estimate of 15 million Canadian dollars. However, the analyst revised his estimate based on the current market conditions. Now, he expects Hexo’s fiscal 2020 revenue to be around 63.2 million Canadian dollars. He expects an EBITDA loss of 39.5 million Canadian dollars.

Alliance Global Partners also reduced the target price to 2.5 Canadian dollars from 3.5 Canadian dollars. Currently, 15 analysts cover Hexo stock. Among the analysts, six recommend a “sell,” three recommend a “strong sell,” two recommend a “buy,” and four recommend a “hold.” The average target price on the stock is 1.81 Canadian dollars. The target price shows an upside potential of 247% from the current trading price.

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Will Hexo be able to rebound?

Currently, Hexo stock is in the middle of a storm. When a stock falls below $1 on the exchange, it has one month to revive its stock price before it receives a warning letter from the exchange. After the stock receives the letter, it has to develop a plan of action for the exchange on how it plans to revive its stock price. After the recent negative news, Hexo stock is trending downwards. The stock closed with a loss of 19.2% at $0.36 on the NYSE and a loss of 20% at 0.52 Canadian dollars on the Canadian exchange.

Like other cannabis companies, Hexo is also prepared to launch its Cannabis 2.0 products in the market this year. However, the recent pandemic has put a halt on cannabis sales. The halt will impact companies’ current revenues and profitability. We can only hope that the crisis ends soon. Like Hexo, Aurora Cannabis (NYSE:ACB) is also at the risk of delisting. Aurora Cannabis stock fell 11.9% on Wednesday. Meanwhile, Canopy Growth (NYSE:CGC)(TSE:WEED), Cronos Group (NASDAQ:CRON), and Aphria fell 6.1%, 4.1%, and 1.3%, respectively.

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What I think about the cannabis industry

I think that some analysts still have a positive outlook for the marijuana industry despite the current headwinds. AltaCorp Capital’s analyst also stated that his long-term outlook for the sector hasn’t changed. He said, “In our view, the entry of new products into the market should lead to significant growth in sales in the industry and a rerating of companies across the sector over the long-term. However, over the near-term, we expect the Canadian cannabis industry will continue to face headwinds from a slow retail store rollout, as well as deteriorating economic conditions due to the Covid-19 epidemic.”

After the coronavirus pandemic ends, the marijuana sector could rebound. Cannabis 2.0 products just started to hit the markets when the coronavirus outbreak happened. There’s still hope that the revenue from Cannabis 2.0 products could help the cannabis sector rebound. So, the long-term prospects still look hopeful. However, the sector faces a financial crisis. The sector needs to combat the crisis for long-term prospects to even show results.

Medical cannabis sales are still high despite the pandemic. Many medical cannabis patients and groups want the government to make cannabis items essential so they’re accessible during the crisis. There’s a high demand for marijuana in the US. Recreational cannabis sales will likely increase in Canada and legal states in the US after the COVID-19 pandemic ends.

As I discussed earlier, marijuana is an evolving industry. For investments to bear fruit, you need to have patience and a stomach to bear the short-term risks. Read Are Marijuana Stocks a Good Investment in March? to learn more about investments in the marijuana industry in March.


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