Canadian cannabis stocks remain volatile due to their weak fundamentals and massive losses. Canada legalized marijuana for recreational use in late 2018, and this sector has since experienced an increase in the number of licensed producers.
While cannabis producers pumped in millions of dollars to increase production capacity, the lower-than-expected rollout of retail stores in major Canadian provinces impacted consumer demand severely. A thriving black market contributed to this decline, resulting in massive oversupply issues for pot producers such as HEXO (TSX:HEXO)(NYSE:HEXO).
This, in turn, resulted in a massive rise in inventory levels leading to multi-million-dollar write-downs and significant losses. In 2019, HEXO introduced lower-priced recreational products to fight off illegal sales. However, as HEXO and peers were posting consistent losses, they had to keep raising equity capital, which diluted shareholder wealth. The COVID-19 pandemic also played its part, as it impacted retail sales and the top line of most marijuana companies.
Now, Canada is rolling out retail store licences at an accelerated pace. Further, the prospect of marijuana legalization at the federal level in the U.S. will provide Canadian marijuana companies access to the largest pot market in the world.
With these factors in mind, let’s see if HEXO stock is a good bet right now.
HEXO stock is down 80% from record highs
Shares of HEXO rose from $4.2 in November 2014 to $42 in April 2019. However, it has since burnt massive investor wealth to trade at its current price of $8.02. While HEXO stock was massively overpriced in 2019, it seems like a solid contrarian bet right now.
HEXO has gone on an acquisition spree this year and first announced the buyout of Zenabis Global for $235 million in an all-stock deal. It was followed by a $50 million acquisition of 48North Cannabis, and HEXO then surprised Bay Street when it disclosed the big-ticket buyout of Redecan for a whopping $925 million.
HEXO believes the acquisition of Redecan will allow it to lead the Canadian recreational cannabis market by the end of Q3 of CY 2021 with a share of 17%.
Prior to the acquisition, HEXO already held a leadership position in Quebec’s recreational marijuana market and was the top player in Canada’s cannabis-infused beverages space. In the fiscal second quarter of 2021 that ended in January, HEXO sales rose 93% year over year to $32.8 million. In the last 12 months, its sales were over $111 million.
Now, Redecan is the third-largest cannabis producer in Canada. Its sales were up 169% in 2020 with a gross margin north of 50%. Redecan is a profitable company that will also impact HEXO’s bottom line positively.
The two companies have generated $211 million in combined sales in the last 12 months, and this figure should move higher in 2021 and beyond.
What’s next for investors?
In 2020, Zenabis’s sales stood at $59.3 million, and the company was close to breaking even. Further, 48North sales were up a stunning 346% year over year in the December quarter at $7.6 million. 48North’s products in the health and wellness space are rising in popularity and the company is focusing on niche items such as cannabis-infused bath salts, intimacy oils, and body creams. Further, Zenabis and HEXO expect to derive $32 million in cost synergies in the 12 months after the acquisition.
HEXO stock has enough room to grow, given these developments as well as its rising brand popularity, leadership position in multiple markets, and improving bottom line.
