HEXO (TSX:HEXO) Stock Crashes 25%: Should You Buy the Dip?

HEXO Corp. (TSX:HEXO)(NYSE:HEXO) just found out what happens when revenue guidance is way off the mark. Is the sell-off overdone or is more downside on the way for the stock?

| More on:
edit Jars of marijuana

Image source: Getty Images

HEXO (TSX:HEXO)(NYSE:HEXO) is the latest pot stock to disappoint the market, and investors are driving the cannabis producer’s share price down in a major sell-off.

The trend of weak earnings reports and dismal outlooks from Canadian marijuana stocks continues.

HEXO’s fiscal 2020 guidance just went up in smoke. The Gatineau-based company said that ongoing distribution bottlenecks and regulatory challenges continue to hinder the market, and its projections for revenue growth are not going to meet previous targets.

The firm says it is expecting fiscal Q4 revenue to be $14.5-$16.5 million, with full-year 2019 revenue coming in at $46.5-$48.5 million.

The company’s CEO is going to take heat from analysts and investors for the update. Only a few months ago, HEXO indicated Q4 revenue would be north of $25 million.

Analysts apparently believed HEXO would hit the target and had anticipated Q4 revenue near that amount with full-year 2019 targets in the $55-$60 million range.

Going forward, HEXO has abandoned the $400 million revenue target it had set for fiscal 2020. Jumping from $25 million to $100 million in revenue per quarter already appeared ambitious, but the huge miss that is forecast right now for the end of fiscal 2019 puts the previous 2020 goal way out of line.

Regaining credibility with analysts and investors is going to be a challenge for HEXO in the coming months.

Focus on profits

A constant complaint from investors in 2019 is that cannabis companies continue to spend to scale up without having any reasonable near-term goal of profitability. The issue really came to the forefront of the industry when market leader Canopy Growth ousted its founder and CEO Bruce Linton in July.

The decision by the board to fire the company’s leader and chairman is widely attributed to impatience from Constellation Brands. The American beverage giant spent more than $5 billion to take a 38% share of Canopy Growth and might have come under pressure from its own board on the rising losses and stalled revenues at Canopy Growth.

Constellation Brands just announced that its CFO will be the new Canopy Growth chairman.

HEXO’s CEO still has his job and said in the update that the company is going to place greater focus on profitability and is evaluating plans to drive more efficiency in the operations.

The cannabis industry is still in its early stages, and ongoing volatility should be expected. The launch of the recreational pot market in Canada has hit a series of speed bumps, including a lack of physical retail outlets, supply shortages, and distribution problems.

In the next round of the market’s growth, cannabis companies are anticipating strong demand for edibles, drinks, and other products, including vapes.

The surge of vaping-related health issues in the United States is going to be a headwind for that line of products.

A week ago, HEXO announced its CFO had resigned. That should have been a heads-up to the market that something might be amiss. The person who held the position had only been in the role for four months.

Should you buy the dip?

At the time of writing, HEXO’s share price is down 25% on the day and trades below $3.70 per share. In April the stock was as high as $11.

With no reliable revenue guidance, let alone a reasonable path to profitability, the company’s current market capitalization of about $950 million appears steep. HEXO could start to run into financing challenges as banks and other lenders take a step back from the industry.

I would look for other opportunities today.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. 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, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Walker has no position in any stock mentioned.

More on Investing

tsx today
Metals and Mining Stocks

TSX Today: What to Watch for in Stocks on Wednesday, November 29

Mix commodity prices could keep the main TSX index flat at the open today, as investors watch the quarterly U.S.…

Read more »

a person prepares to fight by taping their knuckles
Dividend Stocks

TFSA Investors: 2 High-Yield Heavyweights Worth a Sizeable Investment

SmartCentres REIT (TSX:SRU.UN) and another high-yield heavyweight to buy now while rates and fears remain high.

Read more »

Growing plant shoots on coins
Dividend Stocks

Buy These 3 High-Yield Stocks With Healthy Payout Ratios

The payout ratio is a good way to understand a dividend-paying company’s financial stability, and it’s a good way to…

Read more »

Hour glass and calendar concept for time slipping away for important appointment date, schedule and deadline
Dividend Stocks

Your Guide to the Best Monthly Dividend Stocks in Canada

Three of the best monthly dividend stocks in Canada have market-beating returns despite the elevated volatility in 2023.

Read more »

data analyze research
Dividend Stocks

Passive Income: How to Earn $1,191/ Per Year Tax Free

Make $1,191/year in tax-free passive income with these top TSX dividend stocks.

Read more »

Double exposure of a businessman and stairs - Business Success Concept
Bank Stocks

Bank of Nova Scotia Stock: Buy, Sell, or Hold?

Bank of Nova Scotia just reported fiscal 2023 results. Is the stock's dip a buy or is more downside on…

Read more »

Senior couple at the lake having a picnic
Dividend Stocks

3 Under-$30 Stocks That Pay Over a 5% Dividend Yield

These three dividend stocks below $30 could boost your passive income.

Read more »

investment research

Better Bargain: Air Canada Stock or Aritzia?

Air Canada (TSX:AC) and Aritzia (TSX:ATZ) have considerable upside potential if the economy can land on its feet in the…

Read more »