Everyone is waiting for a fresh IPO of the Canadian company Sundial Growers (SNDL) from the cannabis sector. The market is hurting, and stocks are going cheap. Companies such as CannTrust and Canopy have been making investors nervous. HEXO Corp. (HEXO) reported low for the third quarter in June, and since then share sales increased. This is the time to get in on the cannabis market.
Cannabis stocks are going cheap for many reasons. Of course, not to mention CannTrust Holdings (CTST), a driving force behind some problems in the cannabis market. Their bad situations are frightening investors, which led to the company suspending production and the dismissal of their CEO. Another company, Canopy, fired their co-director because of disagreements with their key shareholders. These are all links in the same chain.
HEXO fighting investor anxiety
HEXO investors are not totally certain with the sector either, despite HEXO’s plans of becoming a cannabis world leader and top two in Canada. Their goal rests on three pillars: resources, technology, and infrastructure. For example, only 25 companies are currently developing new products. The products are also designed for customers who want to improve their sleep, health, and diet.
HEXO will provide about 200,000 kg of cannabis in the coming fiscal year. In addition, it has a second supplier that will produce 60,000 kg of cannabis in the next two quarters. The last batch will meet the demand for food and concentrates for Canada’s legalization of extracts in October.
Opportunities and risks in HEXO
Earnings rose from $1.24 million to $15 million, but despite this, the overall profits are still suffering. Furthermore, this reflected a loss of $0.06 per share. Expenses increased to $24.06 million, compared to $5.3 million from previous estimates. These losses should be temporary, as HEXO is expanding through acquisitions.
HEXO finally completed the Newstrike deal, which increased its production capacity to 150,000 kg per year. This expands cultivation to three facilities. In addition, this gives the company access to nine new agreements.
The company’s target revenue is $400 million, though regulations may lead them to miss their goal. If this happens, it will cost the company $100 million, so it is necessary to make the installations work for the autumn. HEXO expects a gross profit of 40% in the near future, and furthermore, believes that 50% is achievable.
Some short-term pressure comes from Quebec, where new manufacturers are emerging. In the long run, however, Quebec producers are not on this scale and they face high costs. HEXO has the scale and reliable partners, and this will allow the company to sell at lower prices, making a profit.
The industry may have a shake-up
Most likely, there will be a shift in the industry over the next 18-24 months. After that, it’s estimated that 80% of small licensed producers will go bankrupt. The funding for them will run out. Although this process will put pressure on the gross profit of HEXO in the short term, they will see a better long-term view.
Transition to more advanced products, as well as autumn’s legalization, may lead to growth in the range of 50%. Yesterday Hexo started with a 5% drop but ended up closing at +10%. This could be a positive signal. Shares in the medium term may grow from the current $4.36 to $10.
The history of CannTrust seriously undermined the sector, and the companies lagged in growth. However, it seems the industry is poised to turn itself around. Now is a good time to enter yourself in the market.
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First published in vc, a third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.
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