For a while, it looked like Charlotte's Web (CWBHF -5.24%) may not succumb to the drastic fall that pot stocks have endured over the past year. After all, being in the legal hemp business has protected the company a bit more since hemp is legal federally, unlike marijuana. That's allowed Charlotte's Web to sell its products in more than 9,000 locations across the country, enjoying widespread distribution in more than 40 states.
Unfortunately, that hasn't been enough to keep the stock safe from the bears. In the past six months, the stock is down 71%, which is more than the Horizons Marijuana Life Sciences ETF's fall of 53% over the same period.
Why is Charlotte's Web crashing?
The sell-off started back in August, around the time that industry giant Canopy Growth released its ugly first-quarter results where it reported a loss of 1.28 billion Canadian dollars. Admittedly, that had nothing to do with Charlotte's Web, but cannabis stocks, even ones that are involved mainly in hemp, can often get dragged down together as investors' concerns rise for the industry as a whole.
Charlotte's Web also did itself no favors in its third-quarter results in November, when it also reported a loss. Although it was a bit more modest at $1.3 million, it was also the first time in the past four quarters that the company wasn't profitable. Its growth was also flat from the second quarter as sales stayed around $25 million.
Later that month, the Food and Drug Administration issued a statement warning customers that cannabidiol (CBD) is not necessarily as safe as everyone thinks it is. FDA Principal Deputy Commissioner Amy Abernethy stated:
We remain concerned that some people wrongly think that the myriad of CBD products on the market, many of which are illegal, have been evaluated by the FDA and determined to be safe, or that trying CBD can't hurt.
It was yet another gut punch to hemp companies, whose hemp-derived CBD products target consumers who are looking for the health benefits of CBD. Concerns that CBD may not be entirely safe put investors on high alert, and rightfully so as it could result in softer sales numbers for a company like Charlotte's Web.
Should investors be worried?
As bad as things have been for Charlotte's Web, there's a real danger that they could get worse. While selling hemp-based products makes the company a safer investment, it also exposes it to more competition. Canopy Growth is looking to get in on the U.S. hemp market, and other Canadian companies have expressed a desire to do so as well. With no way to enter the cannabis market in the U.S. besides hemp, it's become the next best option for marijuana companies. With all of that supply could come a very significant consequence: lower prices.
Julie Lerner, the CEO of PanXchange, an over-the-counter physical commodity exchange, believes there is simply too much supply in the markets today, stating, "Every way you slice it, the physical demand for the CBD market is much, much smaller," and she's surprised that prices haven't started falling. While she notes that demand will likely become a lot stronger over the long term, that won't happen until prices come down.
The end result is a scenario in which a hemp company like Charlotte's Web starts to see its margins shrink, which could affect its ability to remain profitable. Over the trailing 12 months, the company has averaged a gross margin of 74%. And with a profit margin of just 6.8%, even a small decrease in its revenue could put the company into the red on a more consistent basis.
Is Charlotte's Web a buy?
Charlotte's Web is trading right around its 52-week low, and while it may be tempting to buy the stock at that price, there are too many question marks today to justify buying it. Not only is growth a concern, but so are the company's future margins and its ability to stay in the black. Even though it's not as risky as a marijuana stock, that's not enough to make Charlotte's Web a good buy.