One of marijuana’s most popular companies, HEXO Corp (TSX:HEXO) (NYSE:HEXO), had an upsetting June. HEXO stock lost about a sixth of its value for two main reasons that we will look at below.
Shares faced another blow on Tuesday when Oppenheimer downgraded the stock following June’s poor performance. Can HEXO stock catch a break?
HEXO Stock: Oppenheimer Downgrade
Every company is allowed a bad month. And while shares were rocked earlier this week on the downgrade news, they are climbing again today. Currently, they are up 2.17% and selling for $5.19 USD on the NYSE.
On Tuesday, Oppenheimer downgraded the Quebec-based company to “perform” from “outperform” citing “greater gross margin pressure” than what it first expected back in February (when Oppenheimer first initiated coverage of the stock).
In a note to clients, Oppenheimer analyst Rupesh Parikh stated:
“With our updated forecasts and incorporating Newstrike, we now view shares as more fairly valued […] although we are stepping to the sidelines, we still see many positives to the HEXO story longer term and believe the name should remain on the radar for investors.”
There are, of course, many positives associated with HEXO stock. However, June spelled disaster when the company reported its third-quarter operating results on June 12.
Sequential sales results weren’t impressive, and despite a 1,200% increase in year-over-year sales, net cannabis revenue fell 3% from the sequential 2nd quarter. Both medical and recreational sales declined. Furthermore, HEXO Corp’s loss increased dramatically from the year-ago quarter.
HEXO stock instantly dropped over 13% on the results.
Delayed Derivative Sales and Margins Boost
Another concern affecting HEXO stock is Health Canada’s official timeline for the sale of derivative products. Regulation laws regarding cannabis derivatives take effect on October 17, but actual sales in licensed stores won’t be allowed until mid-December at the earliest.
This delay will have a knock-on effect; HEXO Corp has pumped a significant portion of its products into extracts, and so it will likely face another quarter or two without the significant margins boost expected from derivatives sales.
For now, HEXO’s operating results may remain tepid. But the long-term prospects still remain very promising. If investors can wait out this lull, there are potential upswings ahead in 2020.
What are your thoughts on HEXO stock this quarter?
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