Despite a very rough 2021, Hexo (NASDAQ:HEXO) could well be one of 2022’s cannabis turnaround stories. Though the Canadian marijuana grower is growing its revenue rapidly, its highly inefficient operations are finally getting attention from management.
But will the company’s new strategic plans to cut costs while continuing to grow pan out or founder? Could its market cap of $296.42 million have a chance of returning to the heights of 2021, when Hexo was valued at as much as $820.95 million? Let’s look at an argument for each of these possibilities to find out.
A path forward
George Budwell (Bull case): Upon first glance, Hexo comes across as a sinking ship. Despite three major acquisitions last year in a bid to boost revenue, Hexo is still bleeding cash at a dizzying pace. What’s more, the company is going through a major overhaul in its executive leadership at the moment. As a result of these various headwinds, the cannabis company’s share price sank by a jaw-dropping 80% throughout 2021. Hexo’s stock is now in danger of being delisted from the Nasdaq stock exchange due to its sub-$1 share price.
There is one very good reason to be optimistic about the company’s near-term prospects, however. The long and short of it is that Hexo is a top-tier revenue generator in the Canadian cannabis market following its latest acquisition frenzy. That’s an important factor to keep in mind because the Canadian cannabis space is starting to undergo widespread consolidation. Hexo, for its part, stands out as an uber-attractive buyout candidate, thanks to its sizable market share.
What if an acquisition fails to materialize? In that case, Hexo’s stock may be in for further trouble. The company seems to be headed toward another reverse split to remain compliant with the Nasdaq stock exchange, a fact short-sellers are surely going to exploit moving forward.
That being said, Hexo is a logical bolt-on acquisition for multiple Canadian cannabis titans. This beaten-down cannabis stock, in turn, might be worth the risk.
Deteriorating finances leave little to be optimistic about
Alex Carchidi (Bear case): The trouble with Hexo is that none of its fundamentals are trending in the right direction.
The company is strongly unprofitable, and over the last year, its quarterly gross margin has fallen precipitously. It’s currently lingering at more than 63% in the red. Likewise, in the last 12 months, its total debt load has exploded by 531%, reaching CAD$407.84 million. Servicing the debt is already starting to be a drag on growth, with trailing debt repayments sopping up CAD$49.64 million in cash. That’s almost as much as its total revenue of CAD$50.18 million was in the most recent quarter.
Its hoard of CAD$55.76 million in liquid assets won’t be enough to sustain its trailing operating expenses of CAD$116.59 million for another year, which means that it’ll need to take out even more debt. Or, it could dilute its shares further, as it did most recently in August of 2021, with a stock and warrant offering worth $144.8 million.
Management plans to realize cost synergies from recent acquisitions over the next year to avoid this outcome, but investors have little to lose by choosing to wait and see before making a purchase. Investors have little to lose by simply passing on this stock, as there are many better (and vastly more profitable) alternatives in the cannabis pure-play space, such as Trulieve Cannabis.
Don’t bet the farm, even if you’re daring
Regardless of whether you found the bull case or the bear case more compelling, Hexo is a risky stock that you should tread carefully with.
While it’s entirely possible that the company’s new strategic plan will reduce costs in the way that management hopes, you probably shouldn’t be investing in it unless you’re looking for speculative equity to round out your diversified portfolio. If things do start to look up over the course of 2022, investors will have plenty of time to notice the improvements and buy in accordingly.
Until then, keep an eye on the earnings reports, and be sure to confirm an uptrend before making your move.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.