Can This Cannabis Stock Rebound As a Potential Buyout Target?

Since February, the broader cannabis market has seen a decline in stock prices, following a boost from the anticipated U.S. federal legalization of cannabis as the Biden administration stepped into office. A Congressional infrastructure bill passed on to President Biden this past week includes a…

proposal to allow cannabis scientists to purchase product from local dispensaries for research, rather than relying solely on government-grown cannabis.

But it could be too little too late for the stock of some cannabis operators, like Canada’s Hexo (NASDAQ:HEXO), which was recently in the spotlight after auditors from PriceWaterhouseCoopers LLC raised “substantial doubt about Hexo’s ability to continue as a going concern.” Whether the company will have the financial resources to grow and provide a rebound in its stock price has some investors wondering what might be next for Hexo.

A healthy collaboration leads to expansion

Hexo touts itself as an award-winning licensed producer, offering cannabis products, including dried flower, pre-rolls, oils, topicals, edibles, and CBD-infused beverages. Though the flower market in Canada leads the way for cannabis products at 52% market share, the global CBD beverage market offers strong potential for Hexo, as it’s projected to be valued at $14 billion in five years as a result of a 27.5% compound annual growth rate over that span.

So, the opportunity is there for Hexo to grab a share in that market through its joint venture — Truss CBD Beverage Company — with American-Canadian multinational beverage company Molson Coors Beverage Company. The problem is the infused beverage market has not taken off as it was projected to a few years back. In 2020, cannabis beverage sales in Canada accounted for only $28 million of the total legal marijuana sales of $2.6 billion in the country — barely more than 1%.

But the good news is 2021 is on pace to beat out those 2020 numbers. Through the first half of the year, infused beverage sales reached $24 million, putting it on pace to nearly double last year. Now, Hexo is looking toward expansion into the U.S. market for CBD-infused beverage sales. The company purchased its first U.S. production facility in June, located in Colorado, where it will create Truss CBD-infused beverages and have the capacity to produce a full range of cannabis products. The Colorado launch expands the availability of the Truss Veryvell line of beverages to 17 states across the U.S.

Cloudy skies could cause investors to take shelter

Combined with the acquisition of Redecan earlier this year, Hexo is on pace to achieve its goal of being a top-three recreational cannabis producer in Canada. Being a top producer resulted in the company’s fiscal year fourth-quarter earnings report on October 29, highlighting its best quarter of sales to date, reaching $38.7 million, a 71% sequential quarter increase, and a 43% increase over the same period in 2020. Part of what contributed to the record sales was an increase in beverage sales. Cannabis beverage net revenue increased…

 

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