Why Analysts Are Bullish before Charlotte’s Web’s Q1 Earnings

• Analysts expect Charlotte’s Web’s revenue to fall, while its EBITDA should improve in the first quarter.
• Analysts are bullish on the company.
• The company’s first-quarter earnings might boost its stock price.

Charlotte’s Web Holdings (OTCMKTS:CWBHF)(NYSEARCA:CWEB) will likely report its first-quarter earnings before the market opens on May 14. For the quarter, the company’s management expects its YoY (year-over-year) revenue growth to be flat or negative at around $20 million. Analysts expect the company to report revenue of $20.78 million, which represents a fall of 4.2% from $21.7 million in the first quarter of 2019. Sequentially, the company’s revenue could fall by 8.9% to $22.8 million in the fourth quarter of 2019.

In the fourth quarter, Charlotte’s Web’s DTC (direct-to-customer) sales formed 64.9% of its total revenue, while its B2B sales formed 34.9%. The decline in B2B sales could lower the company’s revenue during the quarter. In the last quarter, the company experienced weak sales in the natural health channel segment due to higher competition. Management said that the low entry barrier caused overcrowding in the segment. The company said that the segment will likely be weak during the first quarter. Also, management expects its revenues to be impacted negatively by the disruption amid COVID-19.

Meanwhile, Charlotte’s Web focuses on enhancing the customers’ shopping experience, expanding its distribution breadth across national retailers, and building its portfolio depth within each retailer to drive its sales. In the fourth quarter of 2019, the company upgraded its e-commerce platform, which provides greater segmentation and marketing capabilities. The improved platform increased the company’s conversion rates to double digits in the fourth quarter. In September 2019, the company introduced its hemp-derived CBD-infused gummies in 738 Vitamin Shoppe stores across 45 states in the US. The company expanded its footprint to 11,000 stores in March. These initiatives could offset some of the revenue declines.

For the first quarter, analysts expect Charlotte’s Web to report a negative EBITDA of $5.6 million. The amount is an improvement from a negative EBITDA of $10.2 million in the fourth quarter of 2019. Compared to the same period last year, the amount is a decline from a positive EBITDA of $4.5 million. The company’s management said that it worked to improve its yield and potency last year, which reduced CBD’s production cost. Also, I think that the company’s initiatives to reduce its SG&A expenses could improve its EBITDA during the quarter.

Since Charlotte’s Web reported its fourth-quarter earnings, Eight Capital has lowered its target price. On March 27, the investment firm slashed its target price from 13 Canadian dollars to 9 Canadian dollars. As of May 8, analysts’ consensus price target was 12.11 Canadian dollars, which represents a 12-month return potential of 108.1%. Meanwhile, analysts are bullish on the stock. Among the eight analysts, 75% recommend a “buy,” while 25% recommend a “hold.” None of the analysts recommend a “sell.”

Since Charlotte’s Web reported its fourth-quarter earnings, its stock has increased by 14.1%. Although the company didn’t meet analysts’ expectations in the fourth quarter, the stock rose following the announcement that it would acquire Abacus Health for 99 million Canadian dollars in an all-stock deal. Management expects the deal to close late in the second quarter or early third quarter. However, the deal needs approval from Abacus shareholders. The deal also has to meet customary closing conditions. Meanwhile, the acquisition could raise Charlotte’s Web’s market share in the F/D/M segment to 35%. So, investors have been optimistic about the acquisition.

Despite the recent surge, Charlotte’s Web has lost 41.4% of its stock value this year. The company’s stock price fell due to a warning letter from the FDA in November 2019, concerns about dilution due to new equity offerings, and weakness in the cannabis sector. So far this year, the company has underperformed the ETFMG Alternative Harvest ETF (NYSE:MJ), which has fallen by 31.0%. During the same period, Curaleaf Holdings (OTCMKTS:CURLF), MedMen Enterprises (OTCMKTS:MMNFF), and Cresco Labs have fallen by 23.5%, 63.6%, and 45.5%, respectively.