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Is Namaste Stock on the Verge of a Breakout?

Aditya Raghunath
Road sign warning of a risk ahead

Namaste Technologies (TSXV:N) is a Canada-based e-commerce cannabis company. Namaste’s investors have had quite a ride over the years. Namaste stock has risen over 400% in the last five years. These returns are impressive. But if you investigate further, you will see that the stock has lost a whopping 86% since September last year and has burnt significant investor wealth.

This means Namaste stock had been on an absolute tear between September 2014 and September 2018 when it returned a mind-boggling 5,583%. Most cannabis stocks have lost considerable value since October last year, but few have been decimated like Namaste.

Namaste Technologies has been riddled with controversies

Cannabis stocks were overvalued back in October 2018 and due for a significant correction. The euphoria surrounding cannabis legalization sent these stocks skyrocketing towards all-time highs.

Namaste Technologies saw its quarterly revenue touch a record high of $5.6 million during the fiscal first quarter of 2018 (ended in February). Sales then fell to $4.1 million in the second quarter of 2018.

In October last year, Namaste was hit by a class-action suit. The lawsuit accused the company of failing to disclose the sale of its U.S. subsidiary. In early 2019, Namaste booted its CEO and replaced him with the company’s former product head, Meni Morim. Namaste’s auditor PricewaterhouseCoopers LLP resigned in March 2019, within five months of appointment. Namaste also reported an 18.5% year-over-year drop in company sales during the first quarter of 2019.

Has Namaste stock bottomed out?

Namaste stock is currently trading close to its 52-week low at $0.47 per share. But is there hope for investors, or will the stock continue to spiral downwards? In the second quarter of 2019, Namaste reported revenue of $4 million. Though this was lower than sales of $4.1 million in the prior-year period, the company’s revenue decline has decelerated. Namaste Technologies reported a loss of $8.6 million in the second quarter of 2019. This was higher than the loss of $8.1 million in the prior-year period but lower than the $10.3 million loss in the first quarter.

Namaste might well experience revenue growth in the coming quarters. The global cannabis market is expected to grow at a robust pace. Further, Namaste also acquired a 49% stake in Pineapple Express Delivery, a medical cannabis delivery company. It is now looking to enter the edible cannabis market and announced an intent to acquire a 49% stake in Choklat. These inorganic investments will drive revenue growth for Namaste Technologies.

Do you need to invest in Namaste Technologies?

While most cannabis companies are enterprise-focused, Namaste Technologies has targeted the consumer retail segment. The company is now looking to gain market share and improve working capital management to maximize opportunities in a high-growth market. Namaste has also made technological improvements to its online platform and expanded its list of licensed producers.

Namaste Technologies has reached an agreement to settle its class-action suit. The company will pay less than US$500,00 as part of this settlement. Namaste has a cash balance of $55.8 million, which means the company will have to raise capital if it wants to further grow inorganically.

There are indications that Namaste Technologies is on the cusp of a turnaround. However, it will need to build a sustainable moat to get investors interested. Namaste stock bounced back and gained 16% in May 2019 before wiping out these returns in the last two months. Risk-oriented investors might just take a chance with this stock, but there are still too many uncertainties for the traditional investors at the moment.

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Fool contributor Aditya Raghunath has no position in any of the stocks mentioned.

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