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Why HEXO Stock Is Crashing Today

By Keith Speights – Updated Oct 30, 2020 at 12:09PM

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The Canadian cannabis producer's fiscal Q4 results weren't good enough to please investors.

What happened

Shares of HEXO (HEXO) were trading down by 17.3% as of 12:05 p.m. EDT on Friday, following the release of its fiscal fourth-quarter results after the market closed on Thursday. The Canadian cannabis producer also announced a proposed "share consolidation" -- an 8-to-1 reverse stock split -- early Friday morning. 

So what

The company's results for its fiscal Q4, which ended July 31, actually reflected some solid improvements. HEXO reported net revenue of 27.1 million Canadian dollars, up 23% quarter over quarter, and up 76% year over year. Its gross revenue jumped 17% from the previous quarter and 76% year over year to CA$36.1 million -- an all-time high for HEXO.

Cannabis leaf in front of Canadian flag

Image source: Getty Images.

The bad news, though, was that its bottom line continued to deteriorate. The company recorded a net loss of CA$169.5 million -- much worse than its net loss of CA$19.1 million in fiscal Q3 or its CA$44.7 million net loss in the prior-year period.

Investors clearly weren't happy with HEXO's financial results, but what about the reverse stock split? It needs to perform that maneuver to boost its stock price back above the New York Stock Exchange's $1 per share minimum. If it stays below that threshold, the exchange will delist it.

To be sure, reverse stock splits are never good news for investors because they reflect that the company in question is in trouble. However, these transactions are basically smoke and mirrors -- they don't really affect investors or corporate valuations. The only benefit they provide is the obvious one of ensuring that a company's shares can keep being traded on the major market exchanges.

Now what

What's next for HEXO? One key thing for investors to watch will be its progress toward its goal of generating positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in the first half of its fiscal 2021. HEXO's performance in Canada's "cannabis 2.0" derivatives market will be key to its success on that front. It's likely, though, that this marijuana stock will remain highly volatile until investors are convinced that the company has turned the corner.

Keith Speights has no position in any of the stocks mentioned. The Motley Fool recommends HEXO. The Motley Fool has a disclosure policy.

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