Cronos: Is this Cannabis Stock Still a Buy?
As per investment Bank Stifel, global marijuana sales are expected to reach $200 billion by the next decade. So, investors who can identify the best-positioned companies in the fast-growing market can potentially make a fortune investing in early stage cannabis companies. Will a company like Cronos Group (Nasdaq: CRON) help you make that fortune? Is Cronos cannabis stock still a buy?
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Cronos Group Inc. is a global cannabinoid company with international production and distribution across five continents. Cronos is known for manufacturing, marketing, and distributing cannabis and hemp-derived products. The company has been gaining significant industry attention for its business strategies.
Recent Financial Results for Cronos
The revenues of the Cronos Group were not impressive during the last quarter. Although revenue grew by $5.6 million from Q3 2019 to $11.36 million in Q3 2020, indicating a 96% growth year-over-year, the company still recorded losses. It was the fourth consecutive quarter of gross loss for Cronos. However, gross losses did decrease by $1.6 million from Q3 of 2019. Operating loss in Q3 of 2020 was $41.2 million, a $10.5 million rise from the prior-year period.
Operating expenses increased by a massive 40% over the year. COVID-19 and the government’s action requiring closures or limited occupancy in the retail stores in the U.S. impacted Cronos’ business significantly affecting its sales, distributions, operations, supply chain as well as liquidity thus leading to poor financials.
Cronos Group’s Acquisition Spree
Cronos is quite aggressive when it comes to acquisitions. The most notable of which has been its acquisition of four units in Redwood Holding Group LLC, a hemp-derived CBD-infused skincare and other products producer for $300 million. Also for widening its base in the US this quarter, it teamed up with Kristen Bell for launching its Happy Dance Hemp-derived CBD skincare and personal care products along with rolling out new hemp-derived CBD tinctures under its brand Lord Jones.
Continued expansion across the globe is also in the cards. Cronos made a concentrated drive into the Israeli market and focused on getting certifications for cultivating, producing, and marketing dried-flower, pre-rolls, and oils in the country. It introduced branded dried-flower and oils of its brand Peace Naturals to Israel’s growing medical marijuana market. Apart from that it also exports hemp-derived CBD distillate to the United Kingdom for R&D.
Moves that Didn’t Pay Off for Cronos
A string of failed decisions has taken a toll on CRON’s overall health. Cronos also paid out a massive 70% of its sales as stock compensation despite losing more than $3.6 for every $1 in revenue as it sought rapid expansion. This venture wasn’t much of a success and instead increased the company’s outstanding shares thereby diluting investors’ earning.
Cronos’s highly-anticipated partnership with tobacco major Altria Group hasn’t played out the way it was supposed to. When Altria invested $1.8 billion into Cronos for 45% of the company in December 2018, it was widely assumed that the Cronos-Altria combine would revolutionize the cannabis consumables space. There was certainly olenty of excitement in the vape and other derivative sectors in North America but the venture has simply not played out as anticipated.
In fact, when Altria filed its results for Q3 2020, it said this about Cronos, “Cronos continues to be impacted by COVID-19, due in part to government action requiring closures or limited occupancy of retail stores in the United States.
During the second quarter of 2020, Cronos recorded an impairment charge on goodwill and intangible assets as a result of the impact of COVID-19 (which Altria recorded in the third quarter of 2020 due to its one-quarter lag in reporting Cronos’s results). In addition, the fair value of Altria’s investment in Cronos was approximately 20% less than its carrying value of $1.0 billion at September 30, 2020.”
Bottom Line: Is Cronos Cannabis Stock Still a Buy?
Cronos is one of the most expensive pot stocks in the pot sector having a valuation of more than 83.4 times its revenue. Its premium amount is very high even compared to its fastest-growing peers that are currently trading between 12 to 39 times their respective sales. Its operating loss of around $40 million per quarter is eating up its large cash reserve which is in excess of $1 billion.
Cronos seems like a stock that has lost its way for a bit. There are better options in the cannabis sector to help you make more green.
Cronos: Is this Cannabis Stock Still a Buy?
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