HEXO Stock: Two Downgrades & Hampered Sales Push Investors Away

HEXO stock

HEXO stock is in a questionable position at present. Quebec’s cannabis giant released Q3 results in mid-June and showed unexpected weaknesses in its performance. Also adding to the skepticism, two prominent analysts downgraded the stock.

It’s an important time for the industry; the legal cannabis derivatives market is expected to launch across Canada in October, but sales won’t begin until December.

Currently, HEXO Corp (TSX:HEXO) (NYSE:HEXO) is selling for $5.38 USD on the NYSE American, up 1.13% at the time of writing.

HEXO Stock

Before June, these shares appeared to be on an unstoppable climb. However, the month showed a worrisome trend with HEXO stock losing 16%.

The company’s Q3 results show an underwhelming performance; revenue declined as the company sold less cannabis than expected. That damage was somewhat offset by the company closing its Newstrike Brands acquisition.

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But it’s hard for investors to know where operations will go from here. This takeover significantly increases HEXO’s production scale and reach, which is positive, of course—that is if it can actually sell its cannabis.

And the fiscal 2019 Q3 results cast doubt on this because, during the quarter, HEXO Corp produced 9,804 kg of cannabis but only sold 2,904 kg. The majority of these sales went to the recreational market as the company has practically no involvement in the Canadian medical market. With sales stagnating, margins declined slightly from the month prior and this was likely unexpected—hence the decline in HEXO stock.

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Overzealous?

Now, with its Newstrike acquisition closed, HEXO Corp will have an output of 150,000 kg annually. And according to SeekingAlpha“HEXO had its first harvest in the 1 million sq ft expansion this April, which indicates significant volume growth in the months ahead.”

This quarter, however, was “hampered by limited production capacity and new facilities that have yet to ramp up to full production.”

Can sales for the cannabis derivatives market rescue dried cannabis sales? Possibly, but the hurdles for HEXO stock remain. Derivatives sales won’t begin until mid-December—later than the previously expected October date.

Further, the company has, as stated, received two downgrades from analysts at CIBC and Oppenheimer. That sentiment will also give investors something to think about, and may push HEXO stock further down in the coming weeks.

What are your thoughts on HEXO stock?

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