This Cannabis Vape Market Leader Is Feeling Impact Of Price Competition, Analyst's Thoughts Post Q1 Earnings

Auxly Cannabis Group Inc. CBWTF XLY released its financial results for the three months ended March 31, 2022, on Monday, reporting net sales of CA$22.6 million ($17.49 million), up by 147% year-over-year.

"Amid intense and growing competition and seasonal buying trends in the Canadian cannabis market, Auxly continued to see strength in sales," Hugo Alves, CEO of Auxly sаid.

The company also reported an adjusted EBITDA of negative CA$5.6 million during the period, and it was CA$0.9 million better than the same period in 2021, primarily related to higher gross profits before fair value adjustments and impairment charges, partially offset by higher SG.

In his recent note, Cantor Fitzgerald's analyst Pablo Zuanic said that Auxly's "key priority" for 2022 is to reach positive EBITDA.

The Analyst

Zuanic retained an Overweight rating on the company's stock while lowering the price target to $CA0.20 from CA$0.21 on reduced estimates.

The Thesis

With pronounced price competition for vapes in the Canadian recreational market and several companies selling below cost, Auxly, as the market leader, has "to feel the impact," the analyst said.

In the first quarter of fiscal 2022, the company's vape share decreased to 19.8% from 24.1% quarter-over-quarter.

Moreover, EBITDA margins worsened, declining to 21% from 25% due to operating deleverage.

However, gross margins improved 5pt sequentially to 23% due to cost efficiencies and the company's decision not to "join the race to the bottom," Zuanic said.

The analyst "continues to see the value" in Auxly's top 5 franchise and vape leadership.

While entry into the flower market "makes sense," Zuanic pointed out that it's a "crowded category."

"Lack of an international and medical angle might make the company less of an M&A target, even though we realize it has built a strong niche in derivatives," the analyst added.

Price Action

Auxly's shares traded 1.99% lower at $0.119 per share at the time of writing on Tuesday morning.

Photo: Courtesy of Yiorgos Ntrahas on Unsplash

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Posted In: financial resultsfirst quarter earningsHugo AlvesPablo ZuanicAnalyst ColorCannabisEarningsNewsPenny StocksMarkets