Hexo Corp. is one of the largest licensed cannabis companies in Canada. It is an award-winning consumer packaged goods cannabis company operating out of 2 million sq. ft facilities in Quebec and Ontario. Hexo stands at an interesting point right now. The stock closed April 13 at $7.33, down almost 28% from its February high of $10.17. The outlook for the short-term looks bearish for Hexo but should you buy, sell or hold this cannabis stock?
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Hexo Corp was first incorporated back in 2013, under the name The Hydropothecary Corporation, and was initially created to serve Canada’s medical cannabis market. However, with the legalization of cannabis in 2018, the company renamed itself to Hexo Corp. in order to provide for both the recreational and medical market.
Strong Numbers for Hexo
The company reported its financial results for the second quarter of fiscal 2021 ended January 31, 2021. Net revenue increased to $32.8 million, up 94% from the same period in 2020, and sequential growth of 12% compared with the first quarter of fiscal 2021 ended October 31, 2021.
Non-beverage Canadian adult-use revenue increased by 72% from the prior-year period. Adult-use net revenue increased by 10.5% in the January quarter, marking the fifth consecutive quarter of growth. Gross revenues for the UP brand increased to $3.2 million. The company has been very successful in the last 15 months. In fact, it has never qualified for any of the Canadian government’s emergency response programs.
However, it reported a net loss of $20.84 million, a sequential increase of almost 400% from $4.2 million in Q2 of fiscal 2020.
Hexo Doubles Down on Cannabis-Infused Beverages
In 2018 Hexo partnered with Molson Coors’ Canadian arm to create a venture for cannabis-infused beverages called Truss aimed at the Canadian cannabis market and 2020 was the year it finally managed to reap rewards from this collaboration.
A few months back, Hexo also announced the launch of five new brands under Truss and would soon offer options that would be infused with either CBD or THC.
On April 14, the company announced that it would launch six new products to its existing brands, increasing its portfolio by 50%. This report said, “As the cannabis market in Canada continues to grow, the joint venture of Molson Coors Canada and HEXO Corp has made innovation a top priority to meet the fast-evolving needs of Canadian cannabis consumers.”
The Canadian adult beverage market is worth $8 billion and Hexo is going all out to capitalize on this opportunity. Scott Cooper, President and CEO of Truss Beverage said, “We’ve sold over two million units and took leadership of the category in early 2021 with a 43% market share. The category shows no signs of slowing down and we expect it to continue to evolve and grow well into the remainder of 2021.”
What’s on the Horizon for Hexo?
To make progress and bring out value brands, Hexo announced the launch of ‘Bake Sale’, and the company promises this to be “even more aggressive in terms of pricing” and will be “one of the lowest prices per gram, in the country” having the potential to undercut certain competitors by at least 20%.
This is where Hexo could face hiccups. The company’s top line might grow but what about its margins? Hexo’s net loss increased dramatically this quarter and from the looks of it, the Bake Sale will only exacerbate its falling profit margins.
Lower-priced products require a lot of work when it comes to marketing and advertising and they have to hit a solid scale before they start turning in decent margins. To give context, alcohol giant Diageo just appointed Morgan Stanley in India to overlook the sale of some mass alcohol brands that sell as many as six million cases a year because the math doesn’t make sense for the company.
There is also the matter of Hexo’s acquisition of cannabis producer Zenabis in February, with the agenda of gaining access to the European medical cannabis market. Europe is already flooded with companies that are much better placed than Hexo, and this acquisition might not reap the adequate benefit since the European market already has better-positioned companies which are at a greater advantage.
Hexo is looking for rapid advancement in the Canadian cannabis market but there is a chance that it will stumble before it finds the right mix. But is Hexo Stock a Strong Buy, Sell or Hold?
Bottom Line: Should you Buy, Sell or Hold Hexo Cannabis Stock?
HEXO is a vertically integrated, licensed cannabis company in Canada and the USA. The have more than enough production space and retail sites to be profitable. They sell cannabis topicals, extracts, edibles, and beverages.
They recently announced their acquisition of Zenabis in February 2021. The deal was valued at $235 million CAD and was an all stock deal. This should make them the third largest cannabis company in Canada according to market share. They are also listed on the TSX and NYSE so their is plenty of access to capital.
They have strong branding with their UP, HEXO, and Original Stash brands. Smaller products lines include Time of Day, Decarb, Bake Sale, and Elixir. Their product SKU’s are also impressive including Veryvell their new non-alcoholic sparkling CBD drink through Truss CBD USA, their JV with Molson Coors in Colorado, USA.
HEXO’s revenue through the quarter ending October 31st, 2020 was $56 million CAD with gross revenue increases of 25% QoQ. Interestingly 73% of this revenue comes from within Quebec, their home. During 2021, this has decreased to 51% showing their expanding influence.
Given their shareholder class action lawsuit was dismissed, their acquisition of Zenabis is underway (positioning them as 7th largest Canadian cannabis company in terms of market cap and 5th in terms of revenue), and their revenue is growing and diversifying, there is lots to be positive about. The timing to buy may be perfect too with current stock prices down almost 40% from 2021 highs.
Given all this Cannin.com currently rates Hexo stock as Strong Buy for 2021.
Hexo: Should You Buy, Sell or Hold this Cannabis Stock?
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