As Charlotte’s Web Holdings (CWBHF) trades below $7, the stock is finally at levels where investors can buy the stock. The U.S. CBD market enters 2020 in a highly competitive state and faces FDA uncertainty, but the leading CBD company should attract investor interest as the market value dips to $665 million.
Top Quality
As the cannabis sector in general matures, quality brands will eventually rise to the top. The cannabinol or CBD sector already has topped 4,500 brands leaving the general consumer with limited ability to ascertain the brands with the top quality for the price.
According to MarijuanaBreak, Charlotte’s Web ranked in the top 10 of CBD oils on the market. The company notes that huge gaps exist in the quality of oil on the retail shelves due to lack of regulators. The highest quality hemp-infused CBD comes from the U.S.
Using The Advantage
How Charlotte’s Web takes advantage of a quality designation and a leading market share position remains the question. The company used this position to attract leading retailers such as Kroger (KR), but the potential FDA restrictions on dietary supplements and food products has the major FDM retailers holding back on selling the products.
The House Bill H.R.5587 is looking to instruct the FDA to remove any restrictions from allowing hemp-infused CBD in food products. Such a bi-partisan bill would unleash CWB back towards previous estimates for 2020 revenues topping $350 million.
The stock recently rallied to $10 based on the promises of the bill. Unfortunately, or fortunately for investors on the sidelines, CWB is below $7 for a market cap of $665 million. Even better for new investors, the company recently raised ~$50 million to fund operations while the FDA has a mixed message.
Analysts have updated 2020 revenue targets to only $150 million due to up to 85% of potential retail sales coming from products where the FDA has caused mass retailers to pull back on stocking the items due to a lack of legal and regularity concern. CWB had gross margins topping the 75% range and was highly EBITDA profitable before the business was hit by the FDA safety concerns.
The upside remains for the existing business with access to around 10,000 retail stores when the FDA removes regulatory restrictions. Analysts had previous revenue targets in excess of $350 million for 2020 with gross margins topping 75% and EBITDA margins in excess of 20%. The stock only trades at 2x normalized sales targets and somewhere below 10x normalized EBITDA targets.
Analyst Consensus
Great minds think alike. Over the last three months, three analysts have unanimously declared CWB a "buy." Their average price target is 13.05 per share, suggesting that shares could more than double in the twelve months ahead. (See CWB's price targets and analyst ratings on TipRanks)
Takeaway
The key investor takeaway is that Charlotte Web Holdings is reasonably priced trading near multi-year lows around $6.50. Though risks exist due to the exploding level of CBD brands entering the market, CWB has one of the highest rated brands and biggest market shares to survive and thrive a competitive marketplace. Any removal of FDA uncertainty on food products will immediately send the stock above recent highs above $10. Ultimately, the stock is set with potential upside to reach the previous highs above $20 before the FDA crimped revenue growth.
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Disclosure: No position.
Despite all of the promises for the Canadian cannabis space entering 2020, Aurora Cannabis (ACB) reported one of the worst quarters in the space and the lack of financial discipline has to question where the reorganization will work until new executive leadership joins the company.
EBITDA Loss Doubles
The most alarming number reported for the December quarter was the doubling of the adjusted EBITDA loss. Companies can’t always control revenues, especially in an emerging market with volatile regulations, but any particular company can control expenses.
Aurora Cannabis reported a C$80 million EBITDA loss in the quarter, up from $40 million in the prior quarter. The main culprit was operating expenses surging C$20 million sequentially to over C$106 million.
In no logical way should the company have ramped expenses knowing that Cannabis 2.0 products were set to disappoint. The vape health issue was a big concern in North America and the lack of retail stores in both Ontario and Quebec was logically going to restrict any major revenue boost from these products, yet Aurora Cannabis spent wildly.
Too Many Questions Remain
Investors really have to ponder how Aurora Cannabis is going to cut operating expenses to only C$40 million to C$45 million per quarter. The company is forecasting a cut of above C$60 million from the December quarter levels, but the discussion centered on only eliminating 500 corporate positions.
For FQ2, Aurora Cannabis spent C$71 million alone on general and administration expenses. The company has to eliminate over C$26 million from this category alone while completely wiping out sales and marketing and research and development.
The numbers don’t logically add up to how a company can cut 60% of operating expenses and still maintain the existing revenue levels. Aurora Cannabis still forecasts FQ3 revenues staying generally flat with the C$63 million net cannabis revenues in the last quarter.
So many moving parts aren’t supportive of the company maintaining the existing revenue base. Investors need to remember the existing interim CEO and CFO were executives in charge during the disastrous 2019 year. The company just announced a shift to higher THC products and the introduction of a value brand called Daily Specials. In both cases, investors have to question whether the company is skating towards the market or whether the market will again shift on this executive team.
The large cannabis company burned C$276 million in cash during the quarter. Both the C$135 million burned on operations and the C$131 million burned on investing activities during the quarter were appalling. The company has far too many questions on liquidity and a lack of financial discipline to warrant an investment here.
Consensus Verdict
The market’s current view on ACB is a mixed bag, indicating uncertainty as to its prospects. The stock has a Hold analyst consensus rating with only 3 recent "buy" ratings. This is versus 10 "hold" and 4 "sell" ratings. However, the $2.41 average price target suggests an upside potential of nearly 50% from the current share price. (See Aurora Cannabis stock analysis on TipRanks)
Takeaway
The key investor takeaway is that Aurora Cannabis has a Canadian market with a lot of positive catalysts to play out in 2020, but the company lacks the financial discipline for an investment. The stock trades at $1.50 for a reason and the lack of new executive leadership makes Aurora Cannabis too big of a gamble to buy on any weakness. Investors should prepare for the company to struggle with the massive cuts to the operations spilling over into weak revenues.
To find good ideas for cannabis stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.
Disclosure: No position.