When a company has been around for as long as Cronos (NASDAQ: CRON), in such a young industry, investors look to it to give direction to the broader markets. Cronos is a cannabis company operating across five continents. The company aims to disrupt the IP (intellectual property) space in cannabis by advancing marijuana research, technology and product development. Cronos recently released its earnings report for the fourth quarter and full year results for 2020. The market hasn’t reacted kindly to it. The stock is currently trading at $10.62, down almost 32% from its February 10 price of $15.54. But should you buy Cronos Stock after its Q4 earnings?
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Cronos Q4 Earnings Highlights:
- Net income for Q4 increased by $9.7 million to $17 million ($13.5 million in Canada and $3.5 million in the US) for 2020. For Q4 2019, the figure was $7.3 million.
- Gross loss decreased to $14.9 million from $20.1 million in Q4 2019. This was a reduction of $5.2 million thanks to a decrease in inventory write-down and increase in the gross profit of the US markets.
- There was an inventory write-down of $15 million dollars on dried cannabis and cannabis extracts which was due to the cannabis product price compression in the Canadian markets. The company expects more inventory write-downs due to pricing pressures.
- Adjusted EBITDA loss increased by $1.5 million to $53.1 million dollars in Q4 of 2020.
- Capital expenditure came in at $11 million in Q4 2020. It was an increase of $10.2 million from Q4 2019. This surge in capex was driven by spending at the company’s Peace Naturals campus, Cronos fermentation, its Israeli facility, and the new ERP system.
- Revenue for the whole year came in at $46.7 million, up $23 million for 2019. Continued growth in Canada, US and Israel contributed to revenue that almost doubled. However, gross loss for 2020 increased by $8.2 million to $25.8 million. Losses increased due to the impact of third party purchased flower associated with adult-use products in Canada and a decline in wholesale sales for 2020 versus 2019.
- For the full year, Cronos’ inventory write-downs came in at $26.1 million.
What’s Next for Cronos investors?
“As we look to 2021, I’m incredibly excited about the teams we have supporting our brands and the breakthrough research and development, innovation and exciting marketing campaigns Cronos Group plans to execute on. We are poised to build upon the growth we experienced in 2020 as we continue to push cannabinoid innovation and differentiated product offerings under our portfolio of brands,” said Kurt Schmidt, President and CEO of Cronos Group.
Currently, Cronos has launched its ‘Happy Dance’ bath and beauty products line in ULTA stores. ULTA is a major beauty retailer in the US and this will be the brand’s first brick-and-mortar rollout. Happy Dance features a line of hemp-derived CBD bath and body products. The full collection is expected to launch in the coming weeks on ulta.com, followed by an in-store presence at over 550 ULTA locations across the US. Cronos has partnered with actress Kristen Bell for Happy Dance.
Looking at the growth potential in the US, Cronos has joined the US Cannabis Council as a founding member to advance cannabis legalization in the country. Executive Chairman Mike Gorenstein has commissioned a team internally to analyze the various opportunities in the market at different potential strategies for Cronos to enter. But this is a little too late? The US and Canadian markets are already very crowded and trying to force space here is going to be tough. With the exception of Israel, Cronos hasn’t made any significant inroads in Europe.
Bottom Line: Should You Buy Cronos Stock After its Q4 Earnings?
The company had $1.51 billion in cash at the start of 2020 thanks to an infusion of $1.8 billion from tobacco giant Altria in 2018. However, the company only had $1.29 billion at the end of 2020. That’s a lot of cash burn to generate only $47 million in revenue, especially considering Cronos didn’t make any acquisitions during this period unlike Aphria.
Stifel, Cormark Securities, and PI Financial have all recently raised price targets to $14 from $8 (CAD), to $12 from $8.25 (CAD), to $9 from $7.50 (USD), and to $10 from $7.50 (CAD) respectively. At current levels, Cronos is trading above Stifel’s price target. But is there a potential play here? From a conservative investor’s point of view (if such investors do exist in the marijuana space), Cronos is a no-go. Plus there are plenty of other exciting high-growth stocks in the cannabis industry.
Should You Buy Cronos Stock After its Q4 Earnings?
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