Neptune Wellness NEPT stock is in a transformational period. These kinds of things – transformations – usually translate into a bit of pain in some fashion or another. Neptune is getting into higher growth & margin product lines; they are leaving behind the lower-margin extraction business model. The latest financial release tells a story that there is going to be continual pain; the subsequnet stock drop should confirm that for you..
The question is: Is Neptune Wellness NEPT stock a solid opportunity? In the Complete List of Top 100 Cannabis Companies Neptune’s metrics are impressive in some areas but, not so impressive in other metrics.
The current idea behind Neptune Wellness is that they get away from extraction of THC products that they had contracted to provide for Canopy growth CGC stock, The Green Organic Dutchman TGODF stock, and Tilray TLRY stock, to name a few. The thing is, if you are the middleman on this, doing all of the dirty work of extracting the THC from hemp and cannabis products, So, Neptune is now in tbe busines of selling premium name brand products and letting others do the extracting for them. Actually, this is one of the best business models.
The question for NETP stock holders becomes: Is Neptune Wellness transformation going to succeed and when does the pain stop? For new investors, is this a bargain of a lifetime or a stock to avoid at all cost? For existing shareholders, how long until they are out from being underwater?
Neptune Wellness NEPT Stock Chart
On the news, NEPT stock dropped hard:
This is a 25% drop in one day. Ouch. here has been some moderation in the stock price since the initial drop. Now, where does NEPT stock go?
Neptune Wellness Financial Data
Neptune Wellness NEPT stock metrics in the Complete List of Top 100 Cananbis Companies is as follows:
- #7 Revenue growth; 110%
- #46 Revnue/Share; $0.033
- #97 Gross Margins; -314%
- #94 Operating Efficiencies; 587%
- #92 EBTIDA/Revenue; -372%
- #77 Debt/Asset Ratio; 25.7%
These are some of the worst collective numbers I have seen in any one company. Whereas there are some interesting moves upwards in, say revenue gains, this pales in comparison to other metrics.
Revenue
With my Complete List of Top 100 Cannabis Companies, you might feel a little misled by looking at revenue growth for Netpune Wellness. They posted a modest gain for the quarter moving from $2.6M to $5.5M; a gain of 110%. But, Neptune also saw a previous drop from earlier, more impressive revenues:
The market was disappointed from this; there was an expectation of far more. That being said, management already believes that Q1 reveneus will hit about C$10. – C$12M; nearly double.
Management stated in the latest financial release that the organic baby food produtcts from Sprouts are either now available or soon-to-be-available in both Target and Walmart stores. That is a product line that will gain significant revenue gains as these products are sold in two of the biggest retailers in the United States.
Cautionary consdieration
But, just because Sprouts will be in both Walmart & Target does not mean that this is going to be a bonanza of profits. There is only one company that makes money when you products are sold in Walmart: Walmart. Walmart is notorious for driving down prices on suppliers. This usually means diminished quality and margins.
The flip side of this is, of course, that far more volume will be sold through the world’s biggest retailer. So, there will be revenues and there will be profits, but they will not be extraordinary. You will initially see large increases to revenues and profits. But, I do not see this being sustained longterm. Those that are in on this now, or trying to get into it now, will capitalize. Afterwards, growth rates are likely to diminish.
At the same time, Sprouts, one of a few groups of products being offered by Neptune Wellness, is an organic baby food company. Here at Cannabis Investing Newsletter, I talk about cannabis companies and how to get started in cannabis investing. So, how does an organic baby food producer work into this?
Neptune is also offering cannabis wellness products as well, but they are doing with other producst. They are only working to sell premium branded products; that is where margins will be better.
Gross Margins
Margins are taking a hit from write-downs and other outlying costs:
It is genuinely difficult to figure out what margins would be and therefore it is difficult to figure out where this stock could be given an outlook. Margins are likely to hit about 40% – 50% at some point and I want to use this for Neptune NEPT stock prediction in the future.
If you balance this out, the fact that you have a high volume/low margin organic baby food product line along with the fact that you will have premium cannabis products, the baseline products of the baby food products will sustain and pay for costs. Then, the cannabis products will add additional profits to the bottom line. Remember, Netpune gave up the dirty work of extraction and are going to let another company do that; they will market a finished product.
Operating Costs & Efficiencies
Oeprating efficiencies are so out of line they are almost at the absolute bottom of the list:
This is the result of $32M in operating costs off of $6M in revenues. There is no way this is sustainable for a long period of time.
EBITDA
Neptune is a long way away from EBITDA profitability:
EBITDA profitability is an important metric. I have said this a billion times and I will say it again and again: Investing is a process, not an event. And, companies need to get to EBITDA profitability first. That, is not an event, but a series of processes that will ultimately get the company there.
If we were to break down getting to EBITDA it would likely be a series of margin victories. Gross margins would likely come in about 60%, and Operating Profits would likely be about 20%. Remove the Depreciation and Amortization out of total operating profits and you get EBITDA. For cannabis companies this usually gets to about 30% for the better performers. From there, likely you would see about 10% – 15% in net income off of revenues.
Understanding the key to EBITDA
A company needs a reasonable gross margin. Then, they need to contain operating costs. Once these two metrics have been achieved then it is all about increasing volume to getting to net profitability. This is the path to EBITDA profitability and why it is so important. If the basic core of the business can achieve this milestone then additional production and output will allow for additional marginal profits to hit the very bottom line.
The key importance is that EBITDA will allow for the company to the scale up sales and marginal profits. If a company can achieve EBITDA then the core business will sustain itself. With economies of scale and marginal profits, net income is assured; notwithstanding outlying expenses.
Neptune Wellness NEPT Stock Forecast
What can be done to sort through this mess and ask the simple question: Where will Neptune Wellness NPET stock go next?
The metrics we have do not give us a clearly defining picture of expectations. But, it may be possible to get a better understanding of this company if we project a few things.
First, expectations are for an approximate $55M in revenues this year. Given this, what would happen if NEPT stock hit these numbers and what could happen. As it turns out, not much good.
There are about 165M shares outstanding for NEPT stock. In order for the current stock price to justify the current price there would need to be an approximate $0.025 EPS for a given year. In order to get to that point, Neptune Wellness would need to get to much higher levels with margins and much more efficiency with operational costs. At $0.025 EPS with 165M shares outstanding that is ~$4M in net earnings. That is about 7% of revenue.
Margins & Costs
With $55M in total revenue margins would have to be ~60% and operating costs would have to be 25% with continuing costs eating up the remaining 8%, numbers that are about in line with a balanced company.
So, can Neptune Wellness NEPT stock get to ~60% gross margins? On the level of $55M in revenue, I do not think so. Then, there are operational costs which have been heading higher and higher, faster and faster. They just printed $32M off of $6M in revenues. Nope. This needs to be contained more while revenues need to increase. At $32M, Revenues would need to double beyond the $55M level to justify these kinds of expenses.
Revenues are expected to hit some $10M this quarter which is a far cry from reasonable revenue levels. This means Neptune Wellness cannot hit that profitability level they need this year.
NEPT Stock Outlook
I am goign to wait on Neptune Wellness NEPT stock. I think the stock continues lower as the outlook gets worse and worse. But, the eventuality is that Neptune turns a corner. Investors will get frustrated and pull the plug. That would be the time to get in. I’m looking for a price target of $0.25 – $0.50 per share. Then, go long and hold on for $2.50 – $5.00 – $7.50 a share.
Let’s see how it plays out.
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