HEXO Stock Forecast: Should You Buy the Cannabis Stock Now?

HEXO stock rose almost 10 percent on Aug. 23 in a welcome break for investors. However, the stock has still fallen more than 38 percent over the last month. Most of these losses came after it announced a discounted stock offering. What’s the forecast for HEXO, and should you buy the cannabis stock now?

Cannabis stocks like HEXO have gone through a boom-bust cycle in 2021. The stock hit a 52-week high of $11.04 in Feb. 2021 as Democrats took control of the Senate and reignited marijuana legalization hopes, boosting cannabis stocks.

HEXO announced a $140 million stock offering set to close on Aug. 24. As part of the offering, the underwriters agreed to purchase almost 47.5 million units at $2.95 each. The underwriters have an option to purchase an additional 7.1 million units. Each unit comprises one common share and one-half common stock warrant with an exercise price of $3.45.

Each warrant will be exercisable for one common share for five years, “subject to adjustment in certain events.” HEXO said that it intends to use the proceeds to “satisfy a portion of the cash component of the purchase price payable to the Redecan shareholders on closing of the Redecan acquisition and for expenditures in relation to the Company’s U.S. expansion plans.”

Since the offering was at a significant discount to HEXO’s stock price and meant a massive dilution, markets sent the stock south. Notably, as the security issued by HEXO is dilutive, if the stock price rises, the warrants will be exercised and the outstanding share count will rise further.

HEXO isn't the only cannabis company opting for a massive stock sale. Aurora Cannabis had a stock sale in 2021, and Sundial Growers mastered the art as its stock was boosted by Reddit traders.

Analysts' median target price for HEXO is $5.71, almost 125 percent above its current prices. Their highest target of $9.60 implies an upside of over 277 percent. Of 11 analysts polled by CNN Business, 3 recommend “buy,” five “hold,” and three “sell.”

On Aug. 23, CIBC lowered the stock’s target price while maintaining its “outperform” rating. In Jul. 2021, ATB Capital Markets reiterated its “underperform” rating for HEXO stock.

HEXO has been trying to grow its business organically and inorganically. However, like many other cannabis companies, it's battling perennial losses. In the long term, consolidation could help stabilize marijuana prices. Marijuana legalization in the U.S. could also bode well for the industry.

Also, cannabis sales in Canada have rebounded, which should improve HEXO's organic revenue growth. HEXO has an NTM (next-12-month) EV-to-sales multiple of 3.8x, much lower than that of cannabis companies—possibly due to its high debt load and dilution fears. In comparison, Tilray has an NTM EV-to-sales multiple of 8.2x, while Aurora Cannabis's is 6.4x. Overall, HEXO looks like a good cannabis stock to buy.