In early 2019, all pot stocks were red hot, powered by a rebound in financial markets and improving fundamentals underlying the global-cannabis industry. And the hottest name in this scorching sector was Cronos Group (NASDAQ:CRON). Mostly, investors were excited about the $1.8 billion investment tobacco giant Altria (NYSE:MO) poured into the company. Subsequently, CRON stock went from $10 at the start of 2019 to $25 by February.
That huge rally has since faded. That should be no surprise. The writing was on the wall for a sizable drop. Cronos Group stock had simply come too far, too fast. It was way overvalued at $25, even for a hyper-growth pot stock.
As such, the stock has come cratering back down to reality over the past few months. Today, shares of Cronos trade hands around $16, more than 35% off their February highs. Naturally, the question now is where does CRON stock go next?
Tough to say. Pot stocks are exceptionally volatile. But in the big picture, the bull thesis on Cronos stock still lacks conviction. Even after its 35% correction, the stock remains overvalued relative to its peers, even after you consider Altria’s massive investment. To be sure, investors are hoping that the $1.8 billion influx will lead to huge gains in market share over the next several months.
But almost everyone else in this space also has a ton of cash to use. Therefore, taking that leap of faith for market-share gains seems unnecessarily risky.
All in all, then, CRON stock still doesn’t look great here. If you’re looking for cannabis exposure, I continue to recommend Canopy Growth (NYSE:CGC) for highest-quality exposure, and Aurora (NYSE:ACB) for best value. As for Cronos, I’d stay away.
Cronos Stock Remains Overvalued
The biggest problem with Cronos stock is that the equity remains overvalued relative to peers, and for no good reason.
Cronos grew revenues by 120% year-over-year in the early 2019 quarter, and by 15% sequentially. By Canadian cannabis standards, those numbers are pretty bad. Compatriot Tilray (NASDAQ:TLRY) grew early 2019 revenues by 195% YOY and nearly 50% sequentially. Aurora reported 300%-plus YOY revenue growth and 20% sequential growth.
Meanwhile on the volume side, Cronos reported just 7% kilograms-sold growth sequentially. Both Aurora and Tilray reported 30%-plus sequential volume growth, and on much bigger bases too.
In other words, Cronos reported relatively weak numbers in early 2019 which broadly imply that the company is losing share. Yet, CRON stock continues to trade at a premium against the competition.
Cronos is being valued at $4.7 million per kilogram of cannabis sold last quarter. The average valuation across Canopy, Aurora and Tilray is roughly $1.3 million per kilogram of cannabis sold last quarter, with a range of $1 million to $1.5 million.
Even after factoring cash and debt into the valuation (Cronos has a ton of cash), Cronos Group stock still trades at a huge premium. Last quarter, it carried a value of $3 million per kilogram of cannabis sold last quarter versus roughly $1.2 million across its peers.
A Lot Has to Happen to Justify the Valuation
Clearly, CRON stock still trades at a huge premium to peers. The current growth trajectory doesn’t warrant the premium — it is actually sub-par. Instead, bulls argue that it’s justified because of what the company could do with $1.8 billion from Altria.
Indeed, as Canopy has shown us, having billions of dollars on the balance sheet is a game changer in the still-nascent global-cannabis industry.
But it may be a little too late for Cronos stock. Canopy already has the early lead, and still has more cash on its balance sheet than Cronos. Meanwhile, Aurora is raising $750 million through a mixed-shelf offering. Finally, Tilray has some major partnerships which could turn into huge investments soon.
Long story short, everyone in the cannabis industry has money now. Thus, $1.8 billion from Altria doesn’t mean that much unless Cronos proves it can do something with it. From that perspective, a lot has to happen over the next few quarters in order to justify the current premium valuation for CRON stock. The company must gain exposure to the U.S. market, ramp revenue and volume growth, gain Canadian cannabis share on peers, and expand its global footprint.
If all those things happen, Cronos stock could rally from here. But until that happens, the medium to long-term bull thesis lacks conviction.
Bottom Line on CRON Stock
Cannabis stocks are inherently speculative given the nascent nature of the market. Therefore, you want to be selective about your exposure to the industry. From that perspective, Cronos stock simply doesn’t make the cut. It’s not the highest quality option in the space; that title belongs to Canopy. Nor is it the best value or cheapest name in the space, with Aurora leading that category.
Instead, Cronos is a mixed-quality option with a relatively expensive valuation. Because of this dynamic, the bull thesis on CRON stock fails to provide confidence.
As of this writing, Luke Lango was long CGC and ACB.
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