Shares in the Canadian cannabis giant HEXO (TSX: HEXO) (NYSE: HEXO) have fared significantly worse than the broader markets since early 2019. HEXO stock is currently down 94% below its all-time highs and has burned significant investor wealth.
While most major indices, including the TSX, continued to trade near record highs in 2021, HEXO is also down over 43% year-to-date. Does this make this an attractive contrary bet, or should you stay away from this marijuana heavyweight?
HEXO has a poor record
HEXO managed to grow its revenue from $ 4.93 million in fiscal 2018 to $ 80.78 million in fiscal 2020, which ended in July. However, that sales growth comes at a high price. HEXO, like several other marijuana producers, has made significant investments to expand its cannabis production capacity. The company has also invested billions of dollars to acquire other licensed manufacturers and gain a foothold in an emerging but rapidly growing market.
To finance these acquisitions and its expansion plans, HEXO raised capital through debt and equity. With it remaining unprofitable, the dilution of HEXO’s shareholders has accelerated rapidly as the cannabis producer has amassed operating losses of approximately $ 265 million over the past three fiscal years. By comparison, total revenue between fiscal 2018 and fiscal 2020 was less than $ 135 million.
HEXO and its competitors are struggling to improve profit margins due to a lower pricing environment. Canada’s illegal cannabis market continues to thrive, eating up the addressable market for licensed producers. Additionally, cannabis is a highly regulated industry, which has resulted in a slower-than-expected adoption of retail stores in key provinces.
These factors, in turn, have resulted in high inventory levels, multi-million dollar depreciation, and increasing losses. Between July 2020 and April 2021, HEXO’s inventories rose nearly 50%, suggesting that despite a revival in demand for cannabis products, the company is struggling to outsource products.
HEXO estimated its inventory at the end of the quarter ended April 2021 at $ 94 million. By comparison, net sales for the third quarter of fiscal year were just $ 22.6 million.
Recent acquisitions will be an important sales driver for the HEXO share
HEXO continued its acquisition spree this year and announced three major purchases for 2021. This includes the acquisition of Zenabis Global, Redecan and 48th North. While HEXO will issue shares for the acquisitions of Zenabis and 48th North, it will have to pay over $ 400 million in cash to Redecan, which is also the largest privately owned cannabis producer in Canada.
We see investors expect another round of shareholder dilution going forward as HEXO’s per share loss is projected to be $ 0.48 for fiscal 2021 and $ 0.07 for fiscal 2022. With shares outstanding of 276 million, HEXO’s net loss could reach $ 19.3 million in the next fiscal year, while sales are forecast at $ 262 million.
In addition, the company has over $ 100 million in debt on its balance sheet that requires regular interest payments. A losing company will have a hard time servicing its debt, exposing shareholders to further dilution.
HEXO stock will have a market cap of 713 million, but the company must be racing towards profitability to reduce cash consumption and improve its financials.
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Fool contributor Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool recommends HEXO Corp.