Will Shares of HEXO Sink or Swim in 2020?

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January 9, 2020 12:23pm NYSE:MJ

NYSE:MJ | News, Ratings, and Charts

Now that 2019 is behind us we’re beginning to see a breakout among the pack of publicly traded cannabis companies, and Hexo (HEXO) stock seems like it could go any direction.

One of the main concerns some investors have is that HEXO is not as insulated from the woes of the Canadian recreational market as some of its competitors.

While many of the Hexo’s publicly traded peers have operations in other countries, operations in medical markets, and/or generate revenue via ancillary cannabis operations (such as Real Estate Investment Trusts), Hexo seems to have gone all in on Canada’s Rec 2.0 with their commitment to the derivatives and edibles markets, and its partnership with Molson Coors (TAP).

For the most part, HEXO’s challenges have been uniquely Canadian. While no cannabis stock was immune from the market spike and crash of 2019, Hexo’s situation is being compounded by a bottlenecked Canadian retail market.

Legal edibles, beverages, derivatives and vapes are finally beginning to hit the shelves in Canada this month. But questions remain: How big of a piece is HEXO going to get from that, and how soon?

If Canada’s brief history of the legal market is any indicator (and history often isn’t), the rollout of Rec 2.0 could be slower-than-expected and yield lackluster results. There’s no question that consumer demand is there.

The Canadian Market by Numbers

In calendar Q1 2018, 4.18 million Canadians ages 15 and older used cannabis. By Q3 2019, that number expanded to nearly 5.2 million. Meanwhile, HEXO’s year-over-year growth rate in the trailing three quarters dropped from 27% to 14%.

There is a disconnect somewhere, and by most accounts it begins with the Canadian government’s perplexing rollout strategy for cannabis retail stores. 

For example, between Q1 2018 through Q3 2019 Ontario accounted for nearly 41% of the Canadian cannabis market share. But as of October 2019, the province only had 75 cannabis stores that were approved (or scheduled to be) and open for business. Considering this province has more than 2 million cannabis users, that breaks down 26,972 users per store.

Comparatively, British Columbia has 830,000 cannabis users but only 104 stores, which equals less than 8,000 users per store. And the city of Calgary currently has 200 stores per its 1.34 million residents. Assuming that 17% of them are marijuana users, that figure equates to 1,139 stores per user.

Much of Hexo’s success is pending on how soon the Canadian government can loosen the reins on this hodgepodge retail strategy.  

HEXO stock kicked off the first trading day of 2020 nearly 16% below its $1.96 closing price of Dec. 24. On top of that, Hexo stock is down more than 80% since the beginning of May 2019, leaving many investors to wonder if it’s finally hit bottom.

And just last week the company closed its registered direct offering, under which the Hexo sold 15 million common shares at $1.67 per share, for gross proceeds of $25 million. It also issued 5-year warrants to purchase approximately 7.5 million shares at $2.45.

But these are the types of moves that have investors growing weary on the cannabis industry. While nearly all of Hexo’s peers have resorted to raising cash through equity offerings, investors usually would rather not see companies pursue dilutive measures to continue their growth strategies.

HEXO Corp. (HEXO) was trading at $1.45 per share on Thursday afternoon, up $0.06 (+4.32%). Year-to-date, HEXO has declined N/A%, versus a 22.87% rise in the benchmark S&P 500 index during the same period.

About the Author: Eric Bowler

eric-bowlerEric Bowler is an accomplished journalist providing in-depth insights for more than two decades. Over the past several years his focus has been on the marijuana industry, with a special interest in cannabis growth stocks. His daily coverage of the industry keeps him on top of the key trends with the goal of helping investors make well-informed decisions.

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