Please ensure Javascript is enabled for purposes of website accessibility

3 Big Problems With Charlotte's Web

By David Jagielski - May 19, 2021 at 9:31AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The company's sales were up last quarter, but that isn't sufficent a reason to be excited about the stock.

Charlotte's Web (CWBHF 5.37%) continues to be a frustrating stock for many cannabis investors to hold. After another uninspiring quarterly performance this month, shares of the company -- which sells hemp-based cannabidiol products -- are down yet again. Year to date, its stock has risen by just 3%, while the Horizons Marijuana Life Sciences ETF is up over 20%. There's a big disconnect between how well the industry is doing and Charlotte's Web stock -- but why?

Investors need to look no further than the company's recent results, which it released on May 11. These are three of the most glaring problems that are visible right from its financial statements.

Men in suits looking at a tablet.

Image source: Getty Images.

1. Lack of (consistent) sales growth

The company's earnings release will tell you that for the first quarter ending March 31, its sales of $23.4 million were up 9.1% year over year. But that doesn't tell the whole story, as Charlotte's Web has consistently struggled to generate much revenue growth. In the previous quarter, its sales totaled $26.9 million and were showing promise, growing at a rate of 17.9%. But outside of that record performance, the company's sales have languished, staying within a range of $21 million to $25 million in seven of its past eight quarters.

Management is optimistic, noting that the company has product launches scheduled for early next year in Canada and Israel. But given that those are smaller markets than the U.S., I'm not terribly optimistic that they'll turn the business around. The challenge for Charlotte's Web is that with more states legalizing marijuana, consumers have more options for wellness products, which is likely affecting demand.

Even in the part of the industry focused on hemp and CBD rather than marijuana, there may be too much competition; when Valens announced last month that it was acquiring Green Roads (which owns one of the top CBD brands in the U.S.), management said that they had analyzed more than a hundred companies before making a decision.

Unless Charlotte's Web comes out with a unique product that can captivate consumers, investors shouldn't expect to see the company's growth problem go away anytime soon.

2. High operating expenses

If a business isn't growing, it should at least be making an effort to bring down its expenses in the hopes of getting closer to profitability. But that isn't happening with Charlotte's Web. In Q1, operating expenses of $24 million were 2.9% higher than the $23.3 million it reported a year earlier.

If its operating expenses are higher than revenue (which was the case both this past quarter and a year ago), there's little hope for the company to hit breakeven. Although its gross margins were strong at more than 58% in Q1, there simply isn't enough revenue to flow through and cover the company's expenses.

Its bottom line fell deeper in the red this past quarter to a loss of $13.9 million, a 21.1% increase from the $11.5 million loss it reported in the prior-year period. And although its adjusted EBITDA loss was $1 million less than a year ago, that was primarily the result of fair-value adjustments on warrants and stock appreciation rights.

3. Negative cash flow from operations

High operating expenses can be acceptable to investors if cash flow is strong, as sometimes costs that weigh down a company's earnings don't affect cash and can make a situation look worse than it is. But even from a cash perspective, things aren't looking all that great for Charlotte's Web. During the past three months, it burned through $7.7 million just from its day-to-day operating activities. At least that's an improvement from a year ago, when its cash burn was a negative $14.9 million.

And while the company does have money on the books (more than $35 million in cash and cash equivalents), cash flow is a problem that investors shouldn't ignore. If Charlotte's Web is looking to expand its product offerings or geographical presence, that could significantly increase its need for cash and potentially result in a stock offering, which would dilute existing shareholders and drive down the stock price even further.

Is there any reason to invest in Charlotte's Web today?

Charlotte's Web doesn't have a bad business, but for investors who have many options to choose from in the cannabis industry, it isn't setting itself apart from the pack. If it were at least profitable, investors might be willing to accept its lackluster sales numbers, but that just isn't the case.

The stock is currently at about $3.40, the lowest price it's seen since the end of last year. However, with a questionable future ahead for the company, its valuation could continue to drop. And that's why I struggle to come up with a reason to consider buying shares today. Until Charlotte's Web can make significant (and sustained) improvements to at least one of the items noted above, I wouldn't consider investing in it.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Charlotte's Web Holdings and Valens GroWorks Corp. The Motley Fool recommends Charlotte's Web and Valens GroWorks. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Charlotte's Web Holdings, Inc. Stock Quote
Charlotte's Web Holdings, Inc.
$0.64 (5.37%) $0.03
Horizons Marijuana Life Sciences Index ETF Stock Quote
Horizons Marijuana Life Sciences Index ETF
$5.65 (-0.64%) $0.04
The Valens Company Stock Quote
The Valens Company
$1.06 (9.82%) $0.09

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/12/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.