HEXO Stock Slides After Jefferies Downgrades to Underperform

HEXO Stock

HEXO stock is in the red on Friday after Jefferies analyst Owen Bennett downgraded HEXO Corp (TSX:HEXO) (NYSE:HEXO) to Underperform from Hold, with a price target of C$1.00, down from C$1.90.

Analysts Turn Bearish on Cannabis 2.0

According to Bennett, he believes that Canadian cannabis consensus sales estimates remain too high, and his Cannabis 2.0 analysis finds that economics suggest that the gross margin benefit from new products "may be nonexistent early on." HEXO Corp has invested heavily in the 2.0 market, with 38 patents filed at the end of the most recent quarter, and plans to launch a range of infused beverages through a partnership with Molson Coors (NYSE:TAP) in the first half of 2020. Jeffries' cut to HEXO stock has led to a 1.5% dropoff in share value today.

Bennett may not be too hopeful on the early revenue-generating prospects of HEXO's 2.0 portfolio, but the company could benefit from plans to sell its emulsion technology and other platform technologies to consumer companies or partner with them in developing cannabis derivative products. In relation to its vape products, the company has adopted a development protocol and confirmed such products will be free from thinning agents, like PG and VG, which could impact consumers’ health.

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Potential Upside for HEXO Stock

While Jefferies analysts may have turned slightly sour on HEXO Corp's prospects, MarketRealist remains more upbeat on its potential in the 2.0 market. Despite near-term challenges, like excess supply and price competition, they expect 2.0 products to act as a catalyst for HEXO stock and the entire industry in 2020. Due to differentiation, HEXO can command higher prices for its 2.0 products, which could aid the company’s efforts to cut down on its general and administrative expenses and improve profitability.

HEXO stock is currently trading for $1.88.

Looming Lawsuit

HEXO Corp has been in trouble in recent weeks after it was reported that MediPharm Labs (TSX:LABS) (OTCQX:MEDIF) is suing the company for failing to pay for millions of dollars’ worth of cannabis oil as part of a supply deal signed in 2018. The deal was actually penned between MediPharm and Newstrike Brands, which HEXO subsequently acquired. HEXO believes the deal did not drive shareholder value and intends to vigorously defend the claim. However, HEXO stock is down over 20% since that case was confirmed.

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