The Canadian cannabis stocks continue to diminish investor wealth due to weak financials and a high cash burn rate. While pot companies in the U.S. are racing towards profitability, Canadian cannabis producers such as HEXO are grappling with widening losses, a thriving black market, high inventory levels, increasing competition, and much more.
While the prospects of marijuana legalization in the U.S. at the federal level might be viewed as a game-changer for Canadian companies, there are multiple near-term headwinds that have to be navigated.
Shares of HEXO are currently trading 94% below their all-time highs and are down 44% year-to-date. While HEXO stock might seem like a solid contrarian bet, here’s why I am wary of a rebound.
In the last three years, HEXO’S cumulative operating losses have surpassed $260 million due to which the company has raised equity capital several times, diluting shareholder wealth in the process. In the last 12-months, its operating losses stand at $71.5 million and the company will have to raise additional equity capital due to the recently announced acquisitions.
In May 2021, HEXO announced the acquisition of Redecan which is Canada’s largest privately-owned cannabis producer. This deal was valued at $925 million which includes $400 million in cash. HEXO also announced its intention to acquire Zenabis Global and 48North this year in all-stock deals.
HEXO’s shares count has more than tripled in the last 18 months. In addition, HEXO also has $115 million in debt on its balance sheet.
Analysts expect HEXO’s loss per share to narrow from $7.08 in fiscal 2020 to $0.07 per share in 2022. We can see that due to its negative margins HEXO will be in no position to pay its debt that is due in May 2023 which means investors should brace for additional dilution.
Even if marijuana is legalized in the U.S. it will require additional investments by HEXO further straining its already weak balance sheet. In case interest rates move higher, in an inflationary environment, investors can brace for accelerated dilution of HEXO stock.
Investors might point to the company’s rising revenue estimates. HEXO is forecast to increase sales by 56.6% to $126.1 million in fiscal 2021 and by 107% to $262 million in 2022. However, it's still trading at a forward price to 2021 sales multiple of more than 6x which is sky-high for a fundamentally weak stock.
But unless HEXO can showcase an improvement in its profit margins and lower cash burn rates as well as successfully integrate recent acquisitions, it remains a high-risk bet at current prices.