Among the many reasons cannabis companies are currently suffering, poor financial results are near the top of the list. Case in point: Canopy Growth, the largest marijuana company in the world by market cap, not only recorded a sequential decrease in its revenues during its latest reported quarter but also reported widening losses. Another cannabis company whose financial results have been subpar: Neptune Wellness Holdings (NASDAQ:NEPT).

Neptune recorded revenues of about 4.3 million Canadian dollars during its latest reported quarter -- Q1 2020 -- which represented a 23% sequential decline and a 16% drop year over year. Further, the company posted a negative gross profit (as well as a shrinking gross margin) in the quarter and a CA$6.4 million net loss, slightly worse than the CA$4.8 million net loss it recorded in the previous quarter.

Despite these unimpressive results, though, Neptune might be worth considering. Below are two reasons why.

A dropper releasing a drop of cannabinoid extract.


1. The lucrative CBD extraction market

Neptune's core operations revolve around the extraction and purification of various cannabinoids -- including cannabidiol (CBD) -- from cannabis plants. This business promises to be lucrative for two main reasons. First, cannabis extracts can be turned into high-margin products, and with the recreational market feeling extreme pressure from multiple angles, high-margin alternatives will likely become even more critical for pot companies. Note that the derivative market recently opened in Canada, and demand for the kinds of services Neptune offers will likely increase. Second, CBD is one of the hottest segments of the cannabis market. Estimates for the growth of this segment vary wildly, but some claim that sales of CBD products will reach $20 billion by 2024.

2. Extraction agreements

Neptune seems well positioned to profit from the CBD extraction market. After all, the company has managed to land several important partnerships. Back in June, Neptune entered into an agreement to provide extraction and purification services to Tilray. Under the terms of this agreement, Neptune will receive at least 125,000 kg of hemp biomass over a three-year period from Tilray for extraction and purification purposes. The firm penned a similar deal with The Green Organic Dutchman Holdings and has an ongoing agreement to provide extracted cannabis products to Canopy.

Neptune's long-term contracts with some of the largest marijuana producers -- which could underpin steady revenue growth in the coming years -- may be the best argument to ignore its (thus far) poor financial performance. Lastly, Neptune is in the middle of substantially ramping up its extraction capacity in both the U.S. and Canada, and these efforts might pay dividends in the future. According to the company, "We estimate that, based on a conservative capacity utilization scenario of 50%, our two facilities could support in excess of $450 million in annual revenues."

Should you buy?

The issue for Neptune is that investors have stopped putting their trust in the promises of marijuana companies, and with good reason. The grand opening of the Canadian recreational market was hailed as the beginning of a golden age for pot growers, but the results have been abysmal so far. Given Neptune's less-than-stellar financial performance, although it's worth watching, it is probably too soon to pull the trigger on its stock, at least until the company shows more than promises.

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.