Hexo Stock Forecast: HEXO is an adult-use cannabis brand based in Gatineau, Quebec, which focuses on innovative, smoke-free and traditional cannabis products.
The company, which is a licensed producer of medical marijuana under Health Canada’s Access to Cannabis for Medical Purposes Regulations, offers cannabis peppermint oil, sub-lingual sprays, marijuana powder, and dried flowers among others. HEXO serves cannabis markets worldwide.
As one of the largest licensed cannabis companies in Canada and one of the country’s lowest-cost producers, HEXO Corp operates with 1.8 million sq. ft. of production facilities in Ontario and Quebec. The company also has established a facility in Greece in order to serve the European market.
Incorporated in 2013 under the term The Hydropothecary Corporation, the company was set up to meet the growing demand for cannabis and related products in Canada. The use of cannabis was legalized in Canada in 2018, and the company became HEXO Corp for supplying cannabis for adult recreational activities and retained the name Hydropothecary for medical markets.
HEXO Revenues Are Growing Fast
Adult-use sales in the quarter accounted for 91% of the total revenue. For the fourth quarter and fiscal year ending July 31, 2019, the gross revenue of HEXO Corp. increased from $4.9 million to $59.3 million, an astonishing increase that suggests there’s no shortage of demand for its products.
The company claims the potential for $1 billion in revenues exists in the foreseeable future.
And the net revenues were healthy too. The net revenue at the end of the fourth quarter stood at $15.4 million in comparison to $13.0 million in the previous quarter.
The company appears to have a good cash hoard to finance operations and expansion. Its cash, cash equivalents and short-term investments were $244 million at the end of the last year.
HEXO Corp. Quick Ratio is 21.76 and its Current Ratio is 22.81. The company as such has a healthy ratio between its short-term liquid assets and its short-term liabilities, which dispels fear about it being a risky investment.
HEXO Acquisitions Fuel Expansion
On May 24, 2019, Hexo closed the acquisition of Newstrike Brands Ltd., in the process increasing its production and diversifying total market penetration.
Sales volume in Q4’19 increased 45% to 4,009 kg from an equivalent amount weighing 2,759 kg in the quarter before that. The acquisition of Newstrike contributed 396 kg.
Analysts estimate that HEXO Corp. [HEXO] stock could reach the median target price of $3.76 with a high estimate of 5.44 and a low estimate of 1.91. The current consensus among a majority of investment analysts is to hold stock in HEXO Corp.
Technically speaking, the stock’s Relative Strength Index (RSI) is at 35.12, which suggests that the stock is neither overbought nor oversold.
What Are The Risks of Buying HEXO?
The shares of the Quebec-based cannabis company went on downward spiral after it was downgraded by CIBC, following the 200 job cuts announced recently.
Analysts downgraded the stock from “neutral” to “underperform,” and cut the price target from C$4 to C$3 ($2.30), citing the latest developments as another sign of the challenges facing the country in a tepid Canadian legal cannabis market.
Hexo will down the shutters on several facilities near Niagara Falls, Ontario as a result of the layoffs. Those facilities were once operated by Newstrike Brands, which HEXO acquired in May 2019.
Compressed margins, difficulty in raising capital and a saturating market share were the major reasons cited by the analysts for the dampened sentiment in the Quebec-based cannabis company. The job cuts further indicated the inability to capture consumers’ attention beyond its home province.
The lack of retail footprint and the company’s announcement that it will issue convertible debentures worth C$70 million ($53.5 million) in a private placement further stifled sentiments. The company is also besieged by the slow pace of license approval to roll out retail stores in Canada.
HEXO Corp Stock Forecast Summary
This year has been a rather eventful one for HEXO investors. After soaring more than 140% by late April, the stock has continued to steadily head southwards, but perhaps this is a buying opportunity.
Cannabis investors have been bullish on HEXO for a number of reasons, the primary among them being its joint venture with Molson Coors Canada. It gives the company a chance to leverage Molson’s strong expertise in consumer packaging goods and distribution network as they jointly seek to develop and market cannabis-infused beverages.
On the plus side, HEXO [NYSE: HEXO] recently completed its acquisition of NewsStrike Brands. The deal is expected to significantly boost its production capacity to produce additional cannabis apart from expanding the company’s distribution agreements to eight Canadian provinces.
HEXO [NYSE: HEXO] is also looking towards the European market for medical cannabis as governments in the region loosen their marijuana regulations. HEXO Corp is in the process of building a production facility with a local partner in Greece, which will serve as a cannabis supply center for various European countries.
HEXO also hopes to team up with other big players from outside the cannabis industry, which could help it establish a foothold in the highly lucrative hemp market of the United States.
Is HEXO Stock A Buy?
The annual Canadian adult-use recreational marijuana market could be worth around $5 billion and with close to a 6.5% share, HEXO [NYSE: HEXO] should be able to accelerate revenues that in turn could catalyze HEXO share price growth.
Plus, if the United States changes its federal laws related to marijuana, and if HEXO manages to capture a significant share of the U.S. recreational and medical cannabis markets, the stocks could well witness a precipitous rise.
Besides, the company’s leadership position in Quebec makes it a lucrative prospect for acquisition by a larger company. Consolidation is expected to continue if global cannabis markets exceeds expectations.
On the flip side, the Canadian cannabis market may not grow as much as expected, licensing pace may hinder growth, and regulations may stifle opportunities.
All in all, the ongoing volatility is most likely to continue in the near future. Analysts have mixed reviews when it comes to the 12-month price outlook. Based on the price performance, this investment is somewhat risky, even though it holds potential for a good ROI. A small position in HEXO Corp as such might be of interest for investors who want to get an exposure to the cannabis sector.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.