3 Reasons to Avoid Cronos Group Right Now

Cronos Group (NASDAQ: CRON) is a leading marijuana stock that sells recreational cannabis through its brands Cove and Spinach. It is also equally prominent in the medical cannabis segment through its Peace Naturals brand and operates across five continents. However, this cash-rich pot stock is experiencing some difficult times. It plunged nearly 60% in the past one year, while in 2020 alone, the stock has lost over 14% of its value. We believe there are 3 reasons to avoid investing in Cronos Group right now.

Yet to see results from associations with Altria and Redwood

When Cronos received an equity investment from the leading Altria Group (NYSE: MO) last year, investors’ optimism soared. After closing the deal, the pot stock’s cash reserve increased by $1.8 billion.

Its objective of the partnership with Altria Group was to position itself as a leader in the Canadian vape market. However, due to supply chain issues in Canada, health-scares over vape products in the US, and finally the COVID-19 pandemic, the pot stock is yet to see visible benefits from this association.

In August 2019, the company also acquired four subsidiaries of Redwood Holdings in a unique move. The idea behind this was to add CBD-infused beauty care and consumer products to its portfolio under the Lord Jones brand. The CBD market in the US is indeed promising in the long-term. However, presently the legalization norms for CBD skincare products in the US are ambiguous and limited to a few states only.

Dwindling Cash balance and significant operating losses

It’s true that a strong cash balance is a crucial factor as most cannabis companies are struggling on this front with mounting losses. However, cash alone cannot ascertain the future of this marijuana stock. In Q1, Cronos saw a significant reduction in its cash balance to $1.13 billion from $1.8 billion in the same period last year. Notably, the pot company’s acquisition of Redwood was primarily financed by cash.

The marijuana stock’s first-quarter results also revealed an alarming rise in its operating loss to $45 million – up from $10.1 million in Q1 FY2019. Nevertheless, one thing that surely stands out is the net revenue growth of Cronos which tripled from the last year to reach $8.4 million.

Expensive Price-to-Sales Valuation

Another point to consider is the rather expensive valuation of Cronos relative to its sales. The pot stock is trading at nearly 80x its sales as compared to Canopy Growth at $20.25 and Aurora Cannabis at $5.07. With a history of operating losses, this kind of valuation looks risky for investors in volatile markets such as this.

Investors need to be Cautious Prior to Q2 Results

Cronos Group does have enough cash to sail through this adverse period. However, it’s eroding cash reserve and widening operating loss weighs heavily on investors. If the COVID-19 impact on markets worsens, sustainability could be an issue for this cannabis stock.

Also, its valuation looks inflated at this juncture. Investors should be rather cautious about this marijuana stock, especially in the current bearish market condition. It is advisable to wait and watch until the Q2 earnings to see if there’s an opportunity to invest in this marijuana stock with confidence.

3 Reasons to Avoid Cronos Group Right Now

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3 Reasons to Avoid Cronos Group Right Now