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Why I'm Not Optimistic About the Future of Charlotte's Web

By David Jagielski – Aug 25, 2021 at 7:15AM

Key Points

  • Charlotte's Web has struggled to find ways to consistently grow its business, and those concerns aren't going away because of a good quarter.
  • The company faces significant competition, which could make a challenging situation even worse.
  • When you factor in a weak bottom line, there isn't much of a reason to invest in this business over others in the industry.

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The company showed improvement in its most recent quarterly results, but the same question marks hover over the business.

Charlotte's Web Holdings (CWBHF 4.38%) is a hemp-products company that simply hasn't given investors much of a reason to invest in its business. Without strong sales growth or profits, its financials have been underwhelming. Plus, given that hemp, unlike marijuana, is legal federally in the U.S., the sector is full of competition from companies both inside and outside the U.S.

It's little wonder that the cannabis stock has fallen more than 20% in the past year, even as the Horizons Marijuana Life Sciences ETF has risen by 30%. Charlotte's Web recently released its second-quarter results, and they did little to show that the company is on a better path. Here's why I'm not bullish about the stock's future.

Person reviewing hemp outdoors.

Image source: Getty Images.

Sales are up -- but for how long?

Charlotte's Web released its Q2 results on Aug. 12; for the period ending June 30, it reported revenue of $24.2 million, an 11% increase year over year. That's a positive improvement, but still nothing to get excited about; over the past eight quarters, the company has reported revenue of $25 million or more three times but has failed to consistently build on that. Its top line has been volatile since even before the pandemic started:

CWBHF Revenue (Quarterly) Chart

CWBHF Revenue (Quarterly) data by YCharts

Last year, the company acquired Abacus Health Products, which creates hemp-based products. The move should have given Charlotte's Web a big boost; in reporting the deal, management said that quarterly revenue for both companies combined was more than $29 million for the most recent period. Since the deal, the company hasn't come close to hitting that mark. 

Management believes that Charlotte's Web is in a great position to benefit from an economic recovery as consumers return to brick-and-mortar stores, where many of its products are sold. While it's possible that the next results we see will show a slight sales increase, there's little reason to expect that the business will suddenly break out and crack the $30 million mark. 

Competition isn't going to make it easy

There are a few challenges to more revenue growth in Charlotte's Web's path.

The first is that because hemp is legal at the federal level in the U.S., it has many competitors both inside and outside the country. And as the legal marijuana market in the U.S. grows, consumers will have more options for cannabis-related wellness products, which Charlotte's Web provides. Today, there are 36 states and four territories that allow medical marijuana products.

I'm also a bit concerned that the company is running out of growth opportunities. Charlotte's Web said in its Q2 press release that it has planted its first hemp crop in Canada and that revenue from that should come through in 2022. The problem with that is that Canada isn't a great market to focus on. Cannabis is fully legal there, and there's plenty of competition. Even established marijuana companies struggle to grow; Aurora Cannabis, one of the top producers in the country, reported its sales were down 25% in its most recent quarter (for the first three months of 2021).

Without a stronger top line, the company could be in a difficult situation

Charlotte's Web needs to find a way to grow its sales -- without growth, its bottom line could continue to struggle. Its Q2 net loss of $5.4 million was smaller than the net loss of $14.4 million a year ago, but the company has been in the red in each of the past four quarters. And over the trailing 12 months, it has burned through $41 million.

The stock may be cheap, but it's not worth buying

The lone advantage I see with Charlotte's Web is that with a price-to-sales multiple of less than 4, it's a bit cheaper than Aurora or Tilray, two companies that focus on medical marijuana products. Investors in those companies are paying 5 and 7 times sales, respectively. 

But a low valuation isn't enough of a reason to invest in Charlotte's Web. A lack of growth in this industry can send valuations down quickly, and although the pandemic has hurt the business, it was never the only problem facing Charlotte's Web. Until the company can figure out how to consistently generate revenue growth, this isn't a growth stock I would consider investing in. There are plenty of other businesses in the cannabis industry that are generating much better numbers and are better buys in the short and long term.

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

Stocks Mentioned

Charlotte's Web Stock Quote
Charlotte's Web
CWBHF
$0.66 (4.38%) $0.03

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