Down 98% from records, is this cannabis stock a buy?

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Written by Aditya Raghunath at The Motley Fool Canada

One of the worst performing companies on the Canadian cannabis giant TSX HEXO (TSX: HEXO) (NASDAQ: HEXO) has lost almost 98% of its market capitalization in the past 30 months. HEXO stock hit a record high of $ 42 in April 2019 and is currently trading at $ 1.02 per share, at the time of writing.

Let’s take a look at what impacted HEXO stocks in 2021 and if it should be part of your portfolio right now.

HEXO publishes its first fiscal quarter results

HEXO recently announced its results for the fiscal first quarter of 2022 which ended in October and reported revenue of $ 50.2 million, an increase of 52.6% year over year. other and a sequential increase of nearly 30%. While revenue growth was impressive, HEXO’s net loss widened to $ 91.3 million, from just $ 4.1 million in the period last year and $ 68 million. dollars in the fourth quarter of fiscal 2021. A majority of HEXO’s revenue growth can be attributed to recent acquisitions of 48North. , Redecan and Zenabis, which were completed in the fourth quarter of 2021.

While HEXO is the second largest cannabis company in Canada by market share, its massive losses and high consumption rates have investors worried about the long-term viability of the business.

In the past 12 months, HEXO recorded an operating loss of $ 118 million on sales of $ 144.8 million. It is nearly impossible for the company to avoid further dilution of shareholders in the future, given that it also has to repay more than $ 300 million in debt.

Alternatively, in its first quarter earnings call, HEXO announced a strategic plan called The Path Forward, in which it set out its goals to become the first Canadian marijuana producer to report positive cash flow in 2022 by cutting costs. , improving profitability and streamlining operations.

HEXO shares downgraded by Wall Street

Last week, investment banks CIBC and Canaccord Genuity downgraded HEXO shares to “sell”. While CIBC lowered its target price to $ 0.62 per share, Canaccord reduced its price targets by 50% to $ 0.77 per share.

CIBC analyst John Zamparo explained that HEXO is overly optimistic about achieving positive cash flow over the next year, given that its net loss amounted to $ 90 million in the year. during the last trimester. The cannabis market in Canada remains challenging as licensed producers are affected by increased competition, a thriving black market, high inventory levels and constant losses.

Zamparo, in fact, believes HEXO will need to issue 200 million new shares over the next six months to continue trading. Currently, HEXO has approximately 355 million shares outstanding.

What’s the next step for investors?

HEXO is a leader in the Canadian cannabis market and is expected to grow sales 84% ​​to $ 227.66 million in fiscal 2022 and 31% to $ 298 million in fiscal 2023. Bay Street also expects its loss per share to drop from $ 0.89 in 2021 to $ 0.22 in 2023. But, as seen above, HEXO is struggling with multiple issues, which made a high risk bet, despite its depressed valuation.

The shares are also down 78% year-to-date, and its price on NASDAQ has fallen below $ 1, meaning it will soon be delisted. Last year, HEXO orchestrated a 4: 1 reverse stock split to continue trading on NASDAQ, and it may need to use the same strategy sooner rather than later.

There are much better companies that trade on the TSX that you can place your bets on and generate above-market earnings in 2022 and beyond.

The post HEXO: Down 98% from records, is this cannabis stock a buy? first appeared on The Motley Fool Canada.

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Foolish contributor Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool recommends HEXO Corp.

2021

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