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3 Reasons HEXO’s Q4 Results Should Give Investors Pause

By David Jagielski - Nov 7, 2019 at 2:50PM

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The stock has gone downhill in a hurry

To say that things haven't been going well for HEXO ( HEXO 4.57% ) would be an understatement. Since October, the stock has seen its market cap nearly cut in half, with HEXO's share price falling more than 45% during that time. News that its CFO was leaving and that the company would be withdrawing its forecast for fiscal 2020 are just a couple of big reasons why the stock has fallen by so much.

However, in looking at the company's recent Q4 report, there are three more reasons that should make investors think twice before buying shares of the troubled pot stock. 

1. Another big loss for the company

Unfortunately, losses are not been uncommon for many marijuana stocks. Amid such high growth, many companies are spending tons of money to be able to have their products ready to go and to meet demand. In its most recent quarter, HEXO incurred a net loss of $56.7 million Canadian dollars, more than five times the CA$10.5 million loss it incurred a year ago. 

The main reason for the big loss is that the company's operating expenses of CA$46.9 million were up by more than CA$36 million in just one year and were more than enough to wipe out HEXO's top-line of CA$15.4 million. The concern for investors is that it could prove to be a tall task for the company to get to breakeven, especially with the launch of the edibles market in Canada likely bringing with it more expenditures along the way. 

Cash burning

Image Source: Getty Images.

2. Cash burn could make things a lot more difficult

HEXO finished the fiscal year with a CA$113.6 million in cash and cash equivalents. That's not a terribly high number given that the cash it burned for the entire year from its operations was CA$124.7 million, and that's been trending upward. In Q4, the company used up CA$80.3 million over the course of its day-to-day activities, which was a sharp increase from the CA$10.8 million that it used up during the same period last year. 

Under normal circumstances, the company could just issue more shares if it needed to, and while that's certainly an option, with its stock price being as weak as it is, it's going to require more shares being issued than before, which would only drive down the price even further. If the rate of cash burn doesn't slow down significantly, it could jeopardize the company's growth and there's a real danger HEXO could run short on money. While issuing debt could be a solution, it would likely come with a high interest rate given the risk involved, in addition to restrictive covenants being imposed as well. 

3. Margins may not be strong enough to absorb lower-priced products

HEXO recently announced that it would be looking to offer lower-priced products in an effort to be more competitive with the black market. While that will definitely help bring in more sales, that may not make the situation better for investors. The company's current margins aren't particularly strong as in Q4 HEXO's gross margin before fair value adjustments totaled CA$5.1 million, which was just 33% of its net revenue of CA$15.4 million. 

Putting more pressure on gross margin will make it even more difficult for HEXO to hit breakeven.

Takeaway for investors

Although HEXO has recently fallen to a new all-time low, that's not enough of a reason to buy the stock today. There are some serious issues facing the company and until they're sorted out, they present some serious risks for investors today. All the growth opportunities in the world aren't going to be able to help HEXO if it isn't generating enough cash to pay its bills. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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