Marijuana is one sector that has seen some good days so far this year, even amid the coronavirus crisis. The spotlight is also on pharma stocks like Moderna, mostly in hope of a vaccine. But the marijuana sector seems to be emerging as an underdog, and a surge in cannabis sales since the pandemic hit has helped.
The U.S. cannabis industry in particular has seen tremendous growth this year, although the pandemic in many cases delayed the launch of "Cannabis 2.0" derivatives including vapes, concentrates, beverages, edibles, and more. Cresco Labs (CRLBF -2.79%), Green Thumb Industries (GTBIF 2.50%), and Curaleaf Holdings (CURLF 1.24%) have all seen their revenue skyrocket. Meanwhile, Colorado-based Charlotte's Web Holdings (CWBHF 5.37%) has failed to impress investors this year. Here are points to consider before putting this stock in your basket.
Struggling with growth
Despite having close to 11,000 retail locations at the end of the first quarter, Charlotte's Web hasn't seen revenue growth to match. Its Q1 2020 revenue declined to $21.5 million from $21.7 million the year before.
Meanwhile, peers saw revenue grow as much as threefold. Cresco Labs had a 216% year-over-year rise to $66.3 million, Curaleaf's was up 58.1% to $105 million, and Green Thumb saw a 268% increase to $102.6 million.
Growth was hampered by a lack of clear regulatory guidelines from the U.S. Food and Drug Administration (FDA) regarding the sale of Charlotte's Web's ingestible CBD products, along with lower business-to-business sales.
Since completing its acquisition of hemp products merchant Abacus Health Products in June, Charlotte's Web now has access to a total of 21,000 retail locations, as well as a broader product portfolio, both of which could be growth factors. That said it could take awhile for the acquisition to pay off fully in revenue and earnings.
Profitability is still a question
While most of its U.S. peers reported positive EBITDA, Charlotte's Web is lagging. It reported an EBITDA loss of $5.7 million, highlighted by a 76.5% rise in its operating expenses to $23.3 million. Meanwhile, Cresco Labs, Curaleaf, and Green Thumb reported positive EBITDA of $3.2 million, $20 million, and $25.5 million, respectively, in their first quarters.
Management is reassuring investors that Charlotte's Web is on the correct path, with chief financial officer Russ Hammer stating during the first-quarter earnings call, "We are modeling for revenue growth of 10% to 20% in 2020 and a return to positive adjusted EBITDA by the end of the year."
So far, the stock price has reflected the tepid results. In July, shares of Curaleaf, Green Thumb, and Cresco Labs have gained 21%, 19.6%, and 24.6%, respectively, while Charlotte's Web has declined 5%. The market as tracked by the SPDR S&P 500 ETF is up 3.3% in the same period.
The U.S. CBD market has enormous potential, with market research from Technavio estimating that it will grow by $3.5 billion between 2020 and 2024.
But it faces a short-term headwind from the FDA, which is still indecisive about the benefits of CBD products. Until the agency eases its regulations, the industry cannot thrive, and neither can Charlotte's Web. That said, the company's balance sheet is strong with $53 million in cash at the end of the first quarter, giving it resources to plan for expansion.
What's the verdict?
Even though Charlotte's Web will now hold a greater market share with the Abacus Health acquisition, the COVID-19 crisis still brings a lot of challenges. The company's decline in revenue was mainly because of the shutdown of retail stores. Though lockdowns are easing up now in the U.S. despite a rising number of cases, there are chances of restrictions being imposed again, meaning more store closures. As of July 26, the U.S. now has over 4.2 million confirmed cases, with 149,000 deaths.
It is hard to say whether Charlotte's Web will be able to achieve its targeted revenue growth and profitability for fiscal 2020. Its second-quarter results, due Aug. 13, will provide better clarity. Meanwhile, I would suggest these three top contenders in the cannabis space that are in a much better position to survive and thrive post-crisis.