Is cannabis stock Cronos (CRON) overvalued?

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August 15, 2019 10:24am NYSE:MJ

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From Eric Bowler

While many investors have been bullish about Cronos (CRON) recently, there’s still some lingering sentiment that the stock could be overvalued.  

The exuberance surrounding the stock began about 7 months ago when tobacco giant Altria (MO) bought 45% of Cronos for $1.8 billion. It seems to be a match made in heaven, because as cigarette sales are on the decline, Altria is now well positioned to capitalize on the U.S. cannabis market – should marijuana become federally legal.

Some analysts see this as a win for Cronos too. Last Monday, Piper Jaffray analyst Michael Lavery wrote: “We believe its partnership with Altria provides important capital ($1.8 billion cash) and access into 230,000 U.S. retail outlets, as well as regulatory and vapor product expertise.”   

Altria also has the option to up its ownership stake, which several analysts have opined may happen if federal legalization does go through.

Lavery gave CRON stock an “outperform” rating and $18 price target. He also anticipates that Cronos will use $1.8 billion of Altria capital to launch a U.S. CBD strategy within the next year. He projects that 60% of Cronos’ revenue will come from CBD in 2020.

Indicative of this is Cronos’ recent $300 million acquisition of Redwood Holdings, parent company of CBD brand leader Lord Jones. A Lord Jones claims to fame is that they have nearly 80,000 Instagram followers, which is a strong indicator of the brand’s popularity, particularly amongst millennials.

This year Cronos also has plans in the works for an R&D facility based in Israel, as well as plans to expand capacity for Peace Natural, its medical marijuana brand. But these developments will come at a price, which has some investors concerned about cash burn.

Some analysts see it differently. “We would be more concerned if … they were talking about cost discipline in the organization and trying to rein in investments at this point in the game,” said Stifel analyst Andrew Carter.

However, this speaks to CRON’s potential more than it does their recent earnings release.

A sobering Q2 report

Cronos announced revenues of $10.2 million, which seem pale when compared to larger their rivals who released numbers upwards C$100 million. And CRON only sold 1,584 kilograms last quarter. The net price per gram sank to $6.44, down from $7.03 last Q2.

Yet costs per gram sold actually rose 12% over last Q2 to $3.01. Gross margins were a decent 53%, but CRON ultimately needs to produce at a lower cost as cannabis prices decline and competitors ramp up scale.

Cronos cannabis oil sales only grew enough to reach 20% of total sales during Q2, which is pretty much on par with the rest of the industry, rendering CRON indistinguishable in this category.

Worse still, CRON delivered an adjusted EBITDA loss of $17.7 million. The EBITDA loss increased by $15 million throughout the last quarter, yet revenues were only up $6 million.

The silver lining is that CRON is still flush with cash, ending Q2 with a cash balance of $2.3 billion, which generated more than $12 million in interest during Q2, nearly offsetting the EBITDA losses.

Cronos Group Inc. (CRON) was trading at $12.60 per share on Thursday morning, down $0.67 (-5.05%). Year-to-date, CRON has gained 63.02%, versus a 7.11% rise in the benchmark S&P 500 index during the same period.

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About the Author: Eric Bowler

eric-bowlerEric Bowler is an accomplished journalist providing in-depth insights for more than two decades. Over the past several years his focus has been on the marijuana industry, with a special interest in cannabis growth stocks. His daily coverage of the industry keeps him on top of the key trends with the goal of helping investors make well-informed decisions.

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