News 
Market Data 
Discover
Replies to post #8891 on Cronos Group Inc (CRON)
Hey good points. Im sure they will consult you. You are probably the first person that ever asked these questions. I think you should contact MO and let them know of your new found revelations. Geez, after spending billions, how could they have missed your concerns?
Summary
We continue to be perplexed by the elevated valuation of Cronos; its 32x EV/Sales is difficult to be justified based on fundamentals.
It reported $47M revenue and $147M negative EBITDA for 2020 which we view as the weakest among the top 10 Canadian LPs.
We see no appeal in Cronos shares and believe investors have much better options from both Canadian and U.S. cannabis stocks.
Package delivery with marijuana, payment terminal
Photo by Ivan-balvan/iStock via Getty Images
Cronos (CRON) continues to confound us with its astronomical valuation and continued disastrous financial performance. The company is the most expensive of large Canadian LPs while consistently delivering the worst financial results. We think the stock valuation makes little sense and we continue to more downside to Cronos' current share prices.
(Company Logo)
2020 Financials
Cronos reported 2020 Q4 results that showed another disappointing quarter with little progress. Total revenue grew to $17M including $14M from Canada and international markets and $3.5M from the U.S. CBD business that was acquired from an insider-affiliated fund. While the revenue growth looks promising, it is far from sufficient for a company that sports a $2.2B enterprise value. Given the international segment includes both Canada and Israel, Cronos' market share in Canada is likely less than 2% and much smaller than most Canadian LPs and even smaller independent growers. What's more important is that Cronos appears to lack 2.0 product offerings as ~85% of its Q4 revenue came from flower sales. Cronos also incurred substantial inventory writedown including $26M for full-year 2020. We see more challenges ahead for Cronos as the company lacks capability in product development and marketing in Canada and will be further hurt by price compression and intensifying competition. Cronos never seemed to have strong interests in the Canadian market and its financial performance reflects that.
(Source: Author)
Cronos is weak at cultivation and sales as it incurred negative gross margins for 2020, indicating it lost money on every gram it sold. The company hasn't made money selling cannabis and it is using the cash provided by Altria (MO) to fund ongoing operating losses and SG&A costs. If another company has this kind of financial performance, it would either have gone bankrupt or be forced to downsize similar to what Aurora Cannabis (ACB) has done recently. However, Cronos was lucky to have secured billions of money from Altria so it doesn't have to worry about financing for years. If you consider the level of cash burn at Cronos, it is somewhat concerning that little progress has been made at the company to stem losses and improve profitability. For each of 2019 and 2020, Cronos burned ~$130M from operations and another ~$30M on capital expenditures. It still has $1.2B of cash available so it could keep going for a number of years without new money. However, the company seems a little too complacent with its cash burn and cost structure.
(Source: Author)
We have published our thesis for Cronos over the years and the situation has largely remained the same. Cronos has not made any progress with its operation or strategic direction in recent years to justify its valuation. We think the market is mispricing the stock by valuing it at 32x EV/Sales. Cronos is not profitable and burning ~$150M cash each year which is a major red flag.
Zombie Stock
In our view, Cronos is looking increasingly like a zombie stock that carries limited intrinsic value and is largely used by speculators to play the overall cannabis sector. First of all, Cronos is expensive even among Canadian LPs. It is more expensive than Canopy Growth (CGC) and Aphria (APHA) despite having a significantly less capable platform both in Canada and internationally. If investors are looking for international exposure, Aphria/Tilray (TLRY) provides a stronger global platform. If investors are looking for promising Canadian LPs, there are better options such as Village Farms (VFF) and HEXO (HEXO) with stronger Canadian business and profitability. On the other hand, if investors are looking for fundamentally strong cannabis companies that could deliver on conventional financial metrics, then U.S. cannabis stocks offer better value propositions. We struggle to identify the appeals of Cronos.
(Source: Author)
There are three strategic actions taken by Cronos in recent years but none of them have yielded dividends yet. First of all, Cronos formed a JV with a local farmer to build a cannabis cultivation greenhouse. The greenhouse is expected to be operational during 1H 2021 which is the worst possible time. Canadian LPs have shuttered production and greenhouses rapidly as the industry remains severely oversupplied. We see a challenging market condition for the new JV and expect more operating losses for Cronos. Secondly, Cronos acquired the U.S. CBD business from insider-affiliated owners for $300M. The acquired business generated $3.5M of sales and $12M of EBITDA losses. We think Cronos overpaid for an asset that adds little value. Lastly, Cronos announced a partnership with Ginkgo Bioworks in 2018 to develop lab-grown cannabinoids. We see limited use of this technology and do not expect meaningful revenue for Cronos in the near term. Cronos and Ginkgo have not provided any meaningful update on their program hence our inability to ascribe value to this arrangement.
Looking Ahead
Cronos continues to post weak financial results and its valuation remains stretched. Considering that Cronos trades at 32x EV/Sales and posted $147M of EBITDA losses for 2020, the stock appears highly speculative. We think there are much better options elsewhere for investing in cannabis. We focus on fundamental analysis and we believe Cronos has one of the weakest business models and financial performance among large cannabis firms. Cronos has $1.2B of cash provided by Altria so it has a long liquidity runway ahead. However, we think the company in its current form resembles a shell that lacks substance and concrete strategy. For these reasons, we remain cautious on Cronos shares.
