The U.S. Food and Drug Association has crushed investor hopes for substantial growth in cannabidol (CBD) sales. The government organization doubled down on previous statements surrounding the “safety concerns” of long-term use of CBD along with the lack of clear testing. The FDA currently has CBD products as illegal to market by adding it to a food or labeling it as an dietary supplement.
The new FDA warning will follow with official guidelines at a later date. For now, stores selling ingestibles (food products) will likely continue, but the biggest problem facing the sector is that the large FDM retailers have withheld placing these items in stores due to the uncertainty surrounding the FDA guidelines.
The CBD market opportunity was forecast by the Brightfield Group at the potential of reaching over $21 billion by just 2022. This upside potential likely won’t occur now due to the strong warnings from the FDA leaving open the door for only reaching the low-end potential of $4.4 billion.
The biggest problem for investors is around the FDA warnings that might scare away potential users in the future. Per the FDA based mostly on the limited testing from the FDA-approved drug Epidiolex, CBD has to the potential to harm users via the following:
- CBD can cause liver injury.
- CBD can affect the metabolism of other drugs, causing serious side effects.
- CBD mixed with alcohol or other depressants increases the risk of drowsiness.
One of the biggest concerns of the FDA is the lack of testing on CBD regarding the science, safety and quality of the products. For example, testing on lab animals has already found problems with the male offspring of CBD-treated pregnant females. In addition, little is known in the way of the long-term use impact.
Due to these concerns from the FDA, we’ve delved into these three U.S. CBD companies that will be impacted by the likely slower than expected rollout of CBD products at major retailers and potential reduced demand from consumers in the short term:
Charlotte’s Web Holdings (CWBHF)
Charlotte’s Web Holdings is the leader in the domestic CBD sector and a company that had already warned on the impact of the FDA. The company missed Q3 estimates due to a slower rollout from the FDM channel awaiting clearer regulations from the FDA.
The other problem is the competitive landscape in the CBD category. Previous research had the amount of CBD brands at only 600 last year with the number sky rocketing to 2,800 now.
The market has the worst-case scenario of tons of brands reaching market while the FDA remains restrictive on food products and dietary supplements. The problem for Charlotte’s Web is that only 15% of sales from specialty stores come from topicals (lotions, creams, balm rubs) while the rest comes from the ingestible category.
The CBD company is seeing the most growth from the large retailers with distribution deals with Kroger and Vitamin Shoppe contributing to the FDM retail partners expanding by 787 locations in the quarter. Unfortunately, these stores aren’t generating the expected sales causing Charlotte’s Web to cut revenue estimates to only up to $150 million in 2020 or virtually 50% below previous analyst estimates of around $280 million.
The CBD company recently completed an equity offering raising $50 million reducing the capital dilution risk to new investors. But overall, the stock is dead money until the FDM channel opens up. (See Charlotte’s Web’s price targets and analyst ratings on TipRanks)
CV Sciences (CVSI)
While Charlotte’s Web has a sizable market cap of nearly $1 billion, the other pure stocks in the CBD sector are much smaller. CV Sciences has a listed market value of $114 million with a fully diluted share count of 115 million shares and the stock is already down 15% on the harsher statements from the FDA.
The company actually saw Q3 sales decline from the same period last year due to the uncertain regulatory environment. All while, CV Sciences grew their distribution points by 18% sequentially from Q2 to 5,400 stores. The company is in about half the retail stores of Charlotte’s Web while having similar distribution deals with Kroger and Vitamin Shoppe highlighting the competitive nature of the CBD space already.
The company guided 2019 revenues to $56 million placing the stock valuation at slightly above 2x sales estimates. CV Sciences was highly profitable last year based on strong sector gross margins that topped 70%. The recent hiccup in the space suddenly has the company losing money while only having about $14 million in cash on the balance sheet.
The biggest concern here for the smaller players is the lack of access to cheap capital as the market turns down. (See CV Sciences’ stock-price forecast on TipRanks)
cbdMD is the smallest company in this group with Q3 revenues of only $8.0 million. Contrary to CV Sciences, cbdMD saw revenues surge 150% from last Q3.
The company has a smaller retail footprint with only 3,000 retail doors at the end of Q3, though the numbers are up from only 600 at the end of 2018. cbdMD places a bigger focus on celebrity endorsements that include Bubba Watson from the PGA Tour and Ice Cube’s Big 3 basketball league.
The company expects to drive substantial revenue growth over the next two years going from FY19 sales of $25 million to FY20 sales of $85 million to a whopping $300 million in FY21. cbdMD might have a more successful marketing model in the near term with celebrity endorses outweighing FDA warnings, but the revenue estimates appear far too aggressive for the current competitive landscape.
The company has solid gross margins of 63%, but the operating expenses are far too large pushing the quarterly operating loss to over $6 million on only $8 million in net sales. The FDA regulatory environment is far too restrictive to invest in a money losing CBD company with unrealistic targets. (Find out how the Street’s average price target for cbdMD breaks down)
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