Cronos Group Stock – Latest Trends and Insights

The Cronos Group stock (NASDAQ:CRON) is one of the most widely traded shares, as investors buy into the uniqueness of their business model, as they look to the future, rather than the present when it comes to cannabis.

An overview of the Cronos Group

Almost every one of the major Canadian Licensed Producers (LP) follows the same model of development for massive, capital-heavy, cultivation facilities. However, the Cronos Group stock is not following the herd.

Cronos is quite the opposite, operating with an asset-light model, meaning they are not burdened with the capital burn associated with trying to ramp up cultivation capacity. They prefer to focus on the latter end of the value chain. This model (in some ways) is very similar to Tilray, with both companies wanting to focus on the development and distribution of iconic brands.

However, the asset-light model is where the similarities end, as Cronos looks to the future of cultivation via biosynthesised cannabis cultivation, to drive value for the Cronos Group stock.

Altria Investment drives up the value of the Cronos Group stock price

In November 2018, Cronos received the second-largest cannabis industry investment, when Altria (NYSE:MO), think Marlboro, invested USD$1.8 billion to acquire a 45% stake in Cronos along with warrants that, if exercised, would raise that stake to 55%. They also got 4 of the 7 board seats. They paid a premium – no doubt – but they gained control.

Altria Marlboro and Cronos Group stock

The obvious fit is two-fold. Firstly, tobacco companies are seeing plummeting sales, as the global population finally wakes up to the fatal outcomes of cigarette smoking.

Secondly, their global distribution, knowledge, experience and network give Cronos eventual access (when countries legalise) to one of the best distribution platforms in the regulated products' industry. This will drive long term value for Cronos Group stock.

The Cronos Group launches Peace+

And the first Altria-centric partnership has already materialised, with the launch of Cronos's Peace+ range of hemp-derived CBD products. The US CBD market was ripped wide open with the passing of the Farm Bill of 2018, which legalised the production of industrial hemp, and—importantly—hemp-derived CBD. This is a massive market and one that (with Altria's infrastructure) could generate meaningful revenue numbers going forward, that should have a significant impact on the Cronos Group stock.

Peace+ will produce and sell hemp-derived CBD products such as low-calorie, alcohol-infused CBD drinks. These products will be tested in over 1000 retail stores across the US, utilising Altria's distribution network. The aim is to gain consumer insight (again, an area Altria is acutely experienced in) and through these insights, broaden the product range and increase scale. If they achieve this, it should give impetus to the Cronos Group stock price. Watch this space.

Cronos partner with GinkgoBio to biosynthetically produce cannabinoids

When CRON entered into a deal with Ginkgo Bioworks, whereby CRON will pay up to U$100 million to research and develop the ability to synthesise individual cannabinoids, they laid down the gauntlet as to where the future of Cannabinoid cultivation might be heading.

Cultivating cannabis in large, modern, high-tech greenhouses, required significant capital investment, and also leaves that company at risk of that facility becoming a white elephant, when supply completely dwarfs demand.

If Cronos is right, then synthesizing unique cannabinoids would enable Cronos to create and combine these cannabinoids in proprietary formulations – which may not have occurred in nature – and hence create specific finished products that could treat specific medical ailments, or create unique recreational experiences. All at a fraction of the cost per gram compared to traditional brick-and-mortar cultivators. This would create a significant unique proposition that should underpin further growth in the Cronos Group stock price.

CRON doubles down on vaping technologies with the acquisition of Devices Lab

In a continuation of its capital-light, IP-centric global strategy, the company also purchased a company from Aphria Israel and renamed it Cronos Device Labs. Device Labs, based in Tel Aviv,  will serve as the global hub for R&D associated with vaping and vaping products.

Despite the recent Vaping Crisis, the future of vaping still looks incredibly strong. This is the fastest-growing market in the fastest growing industry in the world, and the company plans to use this company as the foundation for the creation of vape-related biosynthetically produced, cannabinoid and terpene combination products.

Cronos enters the US CBD market with the purchase of Lord Jones

In August 2019, Cronos paid just over $300 million ($225 million in cash and the rest in Cronos shares) to purchase Lord Jones, an upscale producer of CBD-based beauty care products which are sold in retail outlets such as Sephora and the Standard Hotel.

Lord Jones CBD and its impact on the Cronos Group stock

However, Mike Gorenstein—Cronos Chairman and CEO—was (and still is) a founding director of Gotham Green Partners, one of the industry's leading venture capital firms. As part of this deal, Gotham Green stood to collect around 40% of the fee (~$120 million), on an initial investment of $12.8 million.

According to MarketWatch, at the time of the deal, Lord Jones was estimated to generate revenues of between $2 and $4 million. At this run rate, the purchase was valued at between 75 to 150 times annualised revenue. Although this was at a massive premium, a special committee which excluded Gorenstein and Adler and was comprised of a majority of Altria-appointed members, investigated and then voted unanimously approving the transaction. Altria then signed off on the transaction (as is required for any transaction above $100 million).

We believe that with this investment Cronos is well-positioned in the rapidly growing U.S. hemp-based CBD products category.Altria spokesman George Parman

This deal is all about the US. This is CRON's primary entry point for the US, and with the Altria infrastructure behind it, lays the foundation for national brand exposure and awareness. This one deal could be the driving force behind the Cronos Group stock price in the coming 12 to 24 months. 

Cronos Australia aims to capture the Asian market

Cronos Australia (ASX:CAU) recently listed on the Australian Stock Exchange.  Prior to the IPO,  the Cronos Group held a 50% stake in Cronos Australia. However, post the listing this share has dropped to around 31%.

The IPO, which raised over $20 million for the company, is being used to establish CRON's distribution hub for Asia. Cronos Australia has both an import and export license and hence will act as the APAC distribution platform the Peace Naturals (and eventual Peace+) range of products.

While this is not a very big market for Cronos, the gateway to Asia and that is potentially the biggest market of them all. And with the asset-light model being deployed in Australia too, this could position Cronos well, as the Australian production race begins. As we have seen in Canada, so shall we see in Australia.

The cultivation race leads to eventual price compression, and Cronos might be very well positioned to benefit from that. Again, it's not a short term, but rather a long-term opportunity for Cronos Group stock to benefit from the international distribution.

Is the Cronos Group Stock a Buy?

Cronos is one of the largest cannabis companies in the world by market cap. The company is one of only a handful operating the asset-light model, and with their IP investments in Ginkgo Bio and Device Labs, the company is in elite territory when it comes to planning and preparing for the potential future of cannabis.

Disclaimer: Past performance is not an indicator of future performance.

There are three strategic factors that define their global strategy and could drive the Cronos stock price

  • The first is their investment in the biosynthetic production of cannabinoids, which will allow them to produce unique combinations of cannabinoids that may well create significant revenue-generating IP, whilst drastically reducing their cost to produce.
  • The second is their decision to outsource the cultivation of cannabis. Rather than trying to be a farmer and investing millions into cultivation facilities, the company plans to gain their inputs through outer suppliers, freeing up capital, and avoiding a capital-draining down price movement.
  • And thirdly, their decision to adopt US accounting policies combined with the purchase of Lord Jones, is a very clear and direct message to the market, of their intention to focus on the US market, and transform from a Canadian company to a US one.

However, the Cronos stock is not without risk. The synthetic production and fermentation of cannabinoids is still a way off, and their decision to outsource their supply by purchasing their cannabis from the wholesale market means there could be significant pressure on their margins.

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Latest Financial Performance of the Cronos Group

Cronos reported 2019 Q3 results with revenue growing 24% quarter-on-quarter driven by higher volume of cannabis kilograms sold. In the quarter Cronos produced 3,142kg of cannabis. Although this is a staggering 511% increase over Q3 last year, this revenue is still very small compared to its peers. The Lord Jones acquisition also contributed just under $1 million for the quarter. 

Canadian LP Ev/Sales Ranking
Source: Multiple Company Filings

Given how small this annualised revenue rate is, means that the Cronos Group stock trades at a massive Enterprise Value to annualised sales. They, along with Canopy Growth, are the most expensive and overvalued companies when this metric is considered. So although revenue growth is great, it must be put into proportion.

Cost compression on per gram pricing affects the Cronos Group stock

The number that stood out the most, and really panicked the analysts, was the cliff-dropping price per gram that the company received for its products.  This quarter yielded a per gram price of $3.75 which is a staggering 91% drop from the same quarter a year ago. Year-to-date results have suffered as well, falling from $6.74 in 2018 to $4.86 over the same period this year.

However, this price compression was consistent with the results from HEXO, Tilray, Canopy and Aurora, delivered over the past couple of weeks.  However, the above is based on flower only, and with the oncoming sale of edibles and extracts, which are associated with higher margins, coming late this year, we foresee a rising average price per gram in the coming quarters.

Cronos still has a massive war chest

With the November 2018 Altria deal, came a whopping $1.8 billion in cash. Having spent a few dollars here and there, they came out of this quarter with almost $1.4 billion on the balance sheet. This makes Cronos the second most capitalised company on the planet (behind Canopy Growth thanks to their Constellation deal).

Cronos Group Stock with the Altria Impact post the acquisition
Source: Company Presentation

This cash will be extremely useful in riding out the current capital crisis and can be used for any industry-related acquisitions that might be synergistic with the benefits of having Altria in their corner (such as the previously mentioned Peace+ product range).

Gross margins impact the Cronos Group stock

Q3 saw a decline in the gross margin from 53% in the previous quarter to 41%. The reduction in margin was as a direct result of the price compression all of the LP's are experiencing.  On the management call, management explained that they have made the decision to use the wholesale market for their supply of cannabis moving forward. This would include both dry flower and raw oils. Instead, they are going to focus their attention on production and brand creation.

Cronos Group stock quarterly performance
Source: Company Filings

However purchasing cannabis in the wholesale market, as opposed to producing it yourself, will directly impact gross margins. Expect to see pressure on the margins as a result of this strategy, but in the long-run may well turn out to be a very smart move. Over time, the company is betting on its product R&D and branding to differentiate itself.

The CRON's EBITDA is going backwards

Sales growth is one thing, profitability is a whole other ballgame. Although Cronos saw significant increases in revenue, this did not flow down to the bottom line. During the quarter the company reported adjusted EBITDA of -$23.9 million, which was 20% higher than what analysts expected. Analysts did not like this, and the impact of this shortfall was a significant decline in the Cronos Group stock price.

It gets worse when one considers the year-on-year increase in burn. In the first three quarters of this financial year, Cronos has lost over $50 million, compared to just $7 million in the first 3 quarters of the previous financial year. The company is nowhere near profitable at present and doesn't look to be doing so anytime soon. This one is a bet on growth, landgrab and the development of biotech IP.

Disclaimer: Past performance is not an indicator of future performance.

Should I buy Cronos Group Stock?

Although the Q3 results were pretty disappointing, there are still a few positives the company has going for it.

A move to becoming production-centric

Canada's legalisation of recreational cannabis in October 2018 marked the beginning of the recreational era, yet was comprised of flower and low-potency oils only. October 2019 marked the legalisation of derivatives (edibles, extract sand other form factors), and with it the kind of products that consumer really want.

This is the fastest-growing area and form of consumption, and with it come higher margins, and hopefully higher sales. Mike Gorenstein describes Cronos as being cannabinoid focussed, category agnostic company. Whether it be medicinal or recreational, the fact remains that derivative form factors are preferred by consumers in both markets and Cronos look set to take advantage of this. Higher margins, and higher retail selling prices should have a knock-on effect for the benefit of the Cronos Group stock.

In anticipation of this, the company is repurposing some of the facilities at its Peace Naturals Campus to facilitate more R&D and act as the production hub for its derivative products.

Cost improvement that should affect the Cronos stock

The company's investment with GinkgoBio is to de-risk the current price compression and look to the future of cannabis cultivation. This, and the CPG, asset-light model mean that their input costs could significantly improve over time, which of course should have a positive impact on the Cronos Group stock price.

This has already been seen, when considering these quarters figures. Cost of goods sold per gram was $2.27 in the Q3 quarter, nearly 31% down on the $3.28 per gram for the same quarter last year. If they can continue this momentum, it should really assist in bringing the cash burn down.

And finally, that war chest

With over $1.4 billion cash in the bank, Cronos can weather pretty much any storm for the foreseeable future. They have the ability to fund new R&D, accretive transactions and the development of their global footprint. In uncertain times, having this amount of "gas in the tank" makes the Cronos Group stock a safe bet…for now.

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Mark Bernberg
Mark Bernberg

Mark Bernberg is a long-time cannabis investing enthusiast and founder of The Green Fund, Asia Pacific's preeminent media house, positioned at the forefront of the global cannabis industry.

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