The past year has been tough for Charlotte's Web (CWBHF 0.92%) investors. The stock has risen by 2% as the Horizons Marijuana Life Sciences ETF (HMLSF 1.82%) has soared by just about 80%. Part of the reason for the company's weak stock performance is that its growth numbers have been lackluster, at best. Investors have instead been gravitating to higher-growth businesses that sell non-hemp cannabis products, which could benefit from the growing number of states legalizing marijuana for recreational use.
Has this left Charlotte's Web undervalued, creating an opportunity for investors? And with Charlotte's Web coming off a record performance in its most recently reported quarter, is its stock due for a rally?
Charlotte's Web posts record sales
On March 25, the hemp producer released its fourth-quarter and full-year results. Sales for the quarter grew 18% year over year to $26.9 million, its highest total ever. For a while, its top line looked to have plateaued at around $25 million per quarter. Charlotte's Web credits its recent growth in part to a "competitive pricing realignment strategy" that helped it expand its market share. And although it still incurred an adjusted EBITDA loss of $2.1 million, that bottom-line result was an improvement from the $6.7 million loss it incurred in the third quarter.
One reason that Charlotte's Web should be doing better this year is that it completed the acquisition of Abacus Health in June. Today, the company's products are sold through 22,000 retail "doors" across the country, which is 10,000 more than a year ago.
Why the numbers could get even better
Charlotte's Web has struggled during the pandemic. In 2020, its business-to-business sales (B2B) declined by 30% due to COVID-19. Although consumers can buy its products directly from its website, the B2B segment generated 47% of its sales in 2019. But in 2020, that percentage dropped to just 33% as the direct-to-consumer segment grew by 28%. If things get back to normal and the company's B2B sales recover, 2021 could be a much better year for Charlotte's Web. Total company sales of $95.2 million for 2020 were up by just under 1%, even with the inclusion of Abacus Health for part of the year.
In December 2020, Charlotte's Web announced a strategic alliance with InterCure, an Israeli-based company. That deal could lead to sales not just in Israel, but in the European Union as well. Israel is looking to legalize marijuana as early as this year.
Charlotte's Web is also positioning itself for the emergence of the tetrahydrocannabinol (THC) market in the U.S. In March, it announced that it had paid $8 million to secure an option to buy Stanley Brothers USA Holdings. The company is active in three states and has eight more on its radar. Once federal laws in the U.S. permit marijuana use, Charlotte's Web could look to execute the transaction -- although it doesn't have to. The price it would actually pay to acquire Stanley Brothers has not been fixed yet; it would be tied to multiples of its revenue and EBITDA at the time Charlotte's Web exercises its option.
Should you buy Charlotte's Web stock?
At a market cap of $633 million, Charlotte's Web is trading at a price-to-sales (P/S) multiple of just under 6. That's a bit higher than the average pot stock in the sector-tracking Horizons Marijuana Life Sciences ETF, which investors are paying 5 times revenue for. And while shares of Charlotte's Web are down over the past 12 months, the stock is far from its 52-week low of $2.10.
While there are some attractive opportunities for the company over the long term, I wouldn't invest in Charlotte's Web just yet. Valuations are high in the cannabis industry, and if there is a correction on Wall Street, this stock will likely drop further. The company's fourth quarter was noticeably better than the third, but there simply isn't an overwhelming reason to go out and buy up the stock right now, especially at its current price. And it's far from guaranteed that the company will build off its Q4 results in the current quarter; Charlotte's Web has struggled to deliver consistent revenue growth in the past.
Investors would be better served to wait, and in the meantime, consider growth stocks that are delivering much stronger numbers.