Marijuana investors are in a funk today, as shares of Hexo (HEXO -7.99%) drop 9.7%, Aurora Cannabis (ACB -0.19%) declines 7.2%, and Sundial Growers (SNDL -2.03%) falls 5.5%, as of 12:40 p.m. ET. There's a reason why Hexo stock is down so much more than the others, too.
Turns out, it looks like Wall Street hates Hexo.
And when I say "Wall Street," I mean investment banks CIBC and Canaccord Genuity. In twin reports this morning, CIBC downgraded Hexo stock to a sell with a price target of just $0.62 per share, and Canaccord cut its price target on Hexo in half -- to $0.77 -- says The Fly.
Investors obediently sold off Hexo stock to almost precisely Canaccord's more "optimistic" valuation. The shares now trade for just a fraction of a penny over $0.78. But the damage wasn't limited to Hexo. Why not?
Well, consider what CIBC is saying. In today's report, analyst John Zamparo blasts Hexo for announcing an "aggressive and unattainable" goal of reaching positive cash flow next year, right after reporting a huge $90 million-plus loss for its fiscal first quarter of 2022 -- a loss 30 times as big as what it suffered a year ago.
"If anything, HEXO appears to be losing share" in the Canadian cannabis market, warns Zamparo, and conditions in that market are "as challenging as ever" (a fact that bodes poorly for Hexo -- but not only Hexo). Just to stay afloat, the analyst believes Hexo may be forced to create and issue as many as 200 million new shares, or 64% of the shares it already has outstanding, over the next six months.
Such massive stock dilution easily explains why investors are panicking over Hexo stock today. But is the situation as bad at Aurora Cannabis and Sundial Growers? Are the sell-offs at those stocks justified as well?
Well, let's see here. According to data from S&P Global Market Intelligence, Hexo has lost $184 million on sales of $116 million over the past year. With $273 million in net debt on its books, I don't see how the company can avoid a dilutive cash issuance such as CIBC is predicting without issuing more shares.
At first glance, Aurora Cannabis doesn't seem in as dire straits -- its net debt is a more manageable $25 million. Problem is, Aurora lost $479 million over the past year (more than twice as much as Hexo) on sales of $188 million (just 62% more revenue). So clearly, just selling more weed doesn't necessarily translate into profitability, a bad omen for Hexo if it tries to grow itself out of its problem.
For its part, Sundial lost $189 million (about as much as Hexo) on sales of just $37 million (much less than Hexo) -- so selling less marijuana doesn't appear to solve the unprofitability problem, either!
On the plus side, Sundial is plump with cash -- $563 million more than it has debt on its books. And so it seems that of the three, Sundial is actually in a position to survive longer than the others. But unless and until Sundial figures out a way to add to its cash position -- by, you know, actually selling marijuana instead of just selling marijuana stock shares -- I fear Sundial is going to go down along with all the rest.