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HEXO (TSX:HEXO) Stock Crashes 25%: Should You Buy the Dip?

Andrew Walker
Jars of marijuana

HEXO (TSX:HEXO)(NYSE:HEXO) is the latest pot stock to disappoint the market, and investors are driving the cannabis producer’s share price down in a major sell-off.

The trend of weak earnings reports and dismal outlooks from Canadian marijuana stocks continues.

HEXO’s fiscal 2020 guidance just went up in smoke. The Gatineau-based company said that ongoing distribution bottlenecks and regulatory challenges continue to hinder the market, and its projections for revenue growth are not going to meet previous targets.

The firm says it is expecting fiscal Q4 revenue to be $14.5-$16.5 million, with full-year 2019 revenue coming in at $46.5-$48.5 million.

The company’s CEO is going to take heat from analysts and investors for the update. Only a few months ago, HEXO indicated Q4 revenue would be north of $25 million.

Analysts apparently believed HEXO would hit the target and had anticipated Q4 revenue near that amount with full-year 2019 targets in the $55-$60 million range.

Going forward, HEXO has abandoned the $400 million revenue target it had set for fiscal 2020. Jumping from $25 million to $100 million in revenue per quarter already appeared ambitious, but the huge miss that is forecast right now for the end of fiscal 2019 puts the previous 2020 goal way out of line.

Regaining credibility with analysts and investors is going to be a challenge for HEXO in the coming months.

Focus on profits

A constant complaint from investors in 2019 is that cannabis companies continue to spend to scale up without having any reasonable near-term goal of profitability. The issue really came to the forefront of the industry when market leader Canopy Growth ousted its founder and CEO Bruce Linton in July.

The decision by the board to fire the company’s leader and chairman is widely attributed to impatience from Constellation Brands. The American beverage giant spent more than $5 billion to take a 38% share of Canopy Growth and might have come under pressure from its own board on the rising losses and stalled revenues at Canopy Growth.

Constellation Brands just announced that its CFO will be the new Canopy Growth chairman.

HEXO’s CEO still has his job and said in the update that the company is going to place greater focus on profitability and is evaluating plans to drive more efficiency in the operations.

The cannabis industry is still in its early stages, and ongoing volatility should be expected. The launch of the recreational pot market in Canada has hit a series of speed bumps, including a lack of physical retail outlets, supply shortages, and distribution problems.

In the next round of the market’s growth, cannabis companies are anticipating strong demand for edibles, drinks, and other products, including vapes.

The surge of vaping-related health issues in the United States is going to be a headwind for that line of products.

A week ago, HEXO announced its CFO had resigned. That should have been a heads-up to the market that something might be amiss. The person who held the position had only been in the role for four months.

Should you buy the dip?

At the time of writing, HEXO’s share price is down 25% on the day and trades below $3.70 per share. In April the stock was as high as $11.

With no reliable revenue guidance, let alone a reasonable path to profitability, the company’s current market capitalization of about $950 million appears steep. HEXO could start to run into financing challenges as banks and other lenders take a step back from the industry.

I would look for other opportunities today.

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Fool contributor Andrew Walker has no position in any stock mentioned.

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