HEXO (HEXO -8.06%) used to be one of the most promising pot stocks in Canada. Over the past several months, however, things have taken a significant turn for the worse. Investors who hoped things might change in HEXO's fiscal Q1 2020 financial results were disappointed to find out that the company continues to hemorrhage cash.
HEXO's earlier promise of turning a profit in 2020 seems even less likely now, so investors need to ask themselves whether to stay away from this marijuana stock altogether or ride out these losses.
HEXO's key numbers
Net cannabis revenue came in at 14.5 million Canadian dollars for its fiscal Q1 2020 quarter ending on Oct. 31, almost triple the CA$5.7 million reported from the same time last year. However, operating expenses shot up even more, with the company reporting CA$58.5 million in losses from its operations, compared to the CA$14.8 million seen in fiscal Q1 2019. Total net loss came in at CA$62.4 million, 487% higher than last year's CA$12.8 million.
|Metric||Net Cannabis Revenue||Losses From Operating Expenses||Net Losses||Cash Balance|
|Q1 2020||$14.5 million||$58.5 million||$62.4 million||$73.5 million|
|Q4 2019||$5.7 million||$14.8 million||$12.8 million||$23.3 million|
What's even more worrying for HEXO is that its cash and cash equivalents amounted to just CA$73.5 million. This is barely enough to cover the company for one more quarter without seeking more financing, something HEXO will definitely resort to in the future as losses continue to mount.
What does this mean?
This isn't the first time that HEXO's financial figures have been a disappointment. In the previous quarter, the company performed much worse than what Wall Street expected, reporting a CA$43.7 million loss in comparison to the CA$13.2 million loss expected by analysts.
HEXO's management previously said it aims to become profitable sometime in 2020, but this seems to be less likely as time goes on. The company announced it was cutting 200 employees earlier this year to save on costs. HEXO's CEO and co-founder Sebastien St-Louis described these layoffs as "some pretty heavy lifting" and said they are part of a larger plan to make the company profitable. While this is a good first step to cut costs, investors are right to be skeptical about management's promises, especially since so many have failed to materialize.
Earlier this year, HEXO said it expects to earn CA$400 million in net revenue for fiscal 2020. While investors were excited but skeptical about the news, HEXO withdrew that estimate in October. Based on these first-quarter results, HEXO would be lucky to hit even CA$100 million in revenue for fiscal 2020, a far cry from management's previous promises back in 2018.
The bottom line is investors shouldn't get too caught up in whatever HEXO is promising, given its disappointing track record. While management is insisting that the company will become profitable in 2020, it's better to take this promise with a grain of salt.
What should investors think?
Between impending liquidity problems, widening losses, and retracting its overly optimistic revenue expectations, HEXO is surrounded by red flags at the moment. Despite shedding more than 70% of its market value, HEXO still trades at a price-to-sales ratio (P/S) of 12.8, which isn't as cheap as you might think.
While there are pot stocks trading at higher P/S multiples, you can find companies that don't have the same problems HEXO does with similar valuations. Aurora Cannabis has a P/S ratio of 12.0, while Organigram Holdings trades at a 6.5 P/S ratio.
HEXO previously announced it would try to compete with the illegal cannabis market by selling a new value brand called Original Stash at "black market prices." The problem here is that the black market tends to sell pot at a cheaper price than legal retailers. Considering the company's ongoing losses, selling a low price, low-margin product might not make a big difference in the company's overall revenue figures after all.
While HEXO may not be in as dire straights as some other pot stocks, it certainly has its fair share of problems. Instead, look to companies like Canopy Growth, Aurora, or Aphria as potential investments at this time.