The cannabis industry is full of growth opportunities. It has not been uncommon to see multistate operators doubling their sales from one year to the next. But one company in the space that has been struggling to generate much growth is cannabidiol-focused Charlotte's Web (CWBHF +0.00%). Due to stagnant sales numbers and a lack of profitability, its stock is down 37% this year, in contrast to the sector benchmark Horizons Marijuana Life Sciences ETF, which is down by around 3%.
Although the cannabidiol (CBD) stock looks like it might be a bargain, investors need to consider many factors before deciding whether or not it's worth it to take a chance on Charlotte's Web. Below, I'll take a look at why the business is struggling, what it needs to do to have a better year in 2021, and whether the share price is likely to bounce back anytime soon.
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What's wrong with the business?
What cannabis investors normally want to see from a company is revenue growth, especially since profits have thus far often been elusive in the space. When Charlotte's Web released its third-quarter earnings on Nov. 12, its revenue of $25.2 million was a record high. But that was only $100,000 more than the top line from the prior-year quarter. And in Q2, its top line had fallen 13.6% year over year to $21.6 million.
The company did achieve some online sales growth. Its direct-to-consumer segment revenues were up by 27.5% year over year in Q3. However, retail sales faced headwinds as a result of the pandemic. And to make matters worse, through the first nine months of 2020, the company lost $32.5 million. During the same period of 2019, it reported a profit of $3.2 million.
Management always highlights the growth in the number of locations where its products can be purchased. As of Q3, that figure reached 22,000, thanks in part to a boost from its acquisition of Abacus Health earlier this year. A year ago, its products were only available in 9,000 physical locations. Yet despite more than doubling in its reach, there has been no equivalent surge in sales.
What can Charlotte's Web do to turn things around in 2021?
Obviously, Charlotte's Web's needs to find a way to increase its revenue. But with more states legalizing marijuana, customers will have even more choices as to the cannabis products they can buy for pain relief or relaxation. After ballot initiative wins in November's election, 15 states now permit adult recreational use of marijuana, and 36 allow it to be used for medical purposes.
The hemp plants from which Charlotte's Web derives its CBD are legal at the federal level, which in one sense is an advantage to the company. But those plants can't contain more than 0.3% tetrahydrocannabinol (THC), which limits the potency of what it's offering to its customers. In addition, because hemp is fully legal, the company faces more competition from outside of the U.S. That's why improving its sales numbers next year may be a tall order.
But if Charlotte's Web can't fix the top line, then at the very least, it should start slashing expenses. Its headcount totaled 326 in Q3 -- down 5% from 342 active employees a year prior. However, over that time, personnel expenses rose 27%, from $10.4 million to $13.2 million.
The company simply needs to be much more aggressive about bringing its costs down if it wants to strengthen its financials in a way that could get investors buying the stock again.
Is Charlotte's Web stock a buy?
At this point, there isn't a whole lot of reason to be optimistic that 2021 will be much better for Charlotte's Web than 2020 was. It's unclear where sales growth might come from, and the company's expenses are too high for it to get back to profitability anytime soon. Investors would be better off picking cannabis companies that are generating stronger sales numbers, and where the paths to growth are more evident than they are for Charlotte's Web.
