After receiving the backing of Altria Group Inc (NYSE:MO), Canada-based cannabis producer Cronos Group (NASDAQ:CRON) looked like it was headed for significant growth, but it has not delivered. As a result, the performance of CRON stock has been disappointing
Since the deal, CRON has not made meaningful strides in production, which is the name of the game in cannabis, nor has the company expanded notably overseas. Without even factoring in the valuation of CRON stock, I have serious concerns about the company.
CRON just does not have strong enough fundamentals to propel Cronos stock meaningfully higher. The company continues to lag its competitors in production, R&D, and new markets.
Cronos’ production capacity is comparable to the likes of Organigram and CannTrust Holdings (NYSE:CTST), but the market gives CRON stock a substantially larger valuation.
However, it is not clear why that gap is justified, since CRON is a less efficient grower and seller than its two competitors.
Cronos, Organigram, and CannTrust Holdings all have similar capacity now and similar estimated capacity next year. Looking at recent results, though, Cronos clearly grows cannabis less efficiently and sells it less effectively. Cronos sold just 1,111 kg of cannabis last year, while Organigram sold 4,248 kg and CannTrust sold over 3,000 kg.
Cronos is falling behind tremendously.
CRON Doesn’t Have an Edge Overseas
CRON’s international push does not seem to be materially different or more successful than that of its peers. Most of its overseas partnerships are in very competitive areas. Other players have been expanding much more aggressively, and CRON has less ground cultivated overseas than the competition, which will be a hindrance to its growth and to CRON stock.
In Australia, for example, Cronos is aiming for annual production capacity of 2,000 kg. But that is peanuts compared to what Solaris Nutraceuticals Pty Ltd is doing. Its greenhouse will produce around 100,000 kg per year of medical cannabis.
In Latin America, CRON has a 50/50 joint venture with AGI, Colombia’s leading agricultural services provider. However, there has been a big increase in the number of cultivators in the region. Again, just as an example. AGI’s 207 acres of available land pales in comparison to competitors like Colombia’s Pharmacielo, which has over 15 million square feet of land. That translates roughly to production capacity of over 5,000 kilograms.
There’s also Khiron, a Colombian grower that has been expanding its own cultivation area. Its total area is estimated to be capable of producing 100,000 kilograms of dry flower for extraction and processing into medical cannabis.
You get the idea.
Europe is even more crowded. Germany and Poland, where many American-listed Canadian companies have been active in M&A and expanding their footprints, are particularly competitive.
The Bottom Line on CRON Stock
The cannabis industry is a very attractive space to be in, but there are bound to be some duds. At the moment, Cronos Group stock is shaping up to be a good name to short. One caveat is that Cronos does has a decent cash balance.
Overall, investors can always generate profits by reducing exposure to the laggards and doubling down on the leaders. Investors should be reducing their exposure to CRON stock.
As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.
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