The marijuana industry has been blazing hot to begin 2019, and perhaps no pot stock with a valuation of more than $1 billion has been hotter than Cronos Group (NASDAQ: CRON). Shares of the Ontario-based grower have more than doubled since early December, which is when the company announced that it was receiving a $1.8 billion equity investment from tobacco giant Altria (NYSE: MO) -- an investment that closed this month and gives Altria a 45% equity stake in Cronos.
With Wall Street investment banks and independent research reports calling for substantial growth in the marijuana industry over the next decade, the belief among investors has been that Cronos Group's partnership with Altria and its now-rich cash position puts it in pole position to succeed.
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But as the company's recently released fourth-quarter and full-year report showed, this couldn't be further from the truth. If anything, Cronos Group's operating results reaffirmed my belief that it's the most overvalued pot stock on the market.
Cronos Group's fourth-quarter and full-year operating highlights
Don't get me wrong -- Cronos Group had plenty to tout with the release of its fourth-quarter and full-year results. Net sales for the recent quarter, which include recreational sales since Canada lifted the curtain on adult-use prohibition on October 17, as well as excise taxes that are reduced from gross revenue, rose 248%, to 5.6 million Canadian dollars ($4.2 million). The company cited the legalization of recreational weed and organic growth in cannabis oil revenue sales for its more than tripling in year-over-year sales.
For the full year, sales growth was an even more robust 285%, with revenue clocking in at 15.7 million Canadian dollars ($11.7 million). Here, Cronos attributed growth to recreational legalization, higher cannabis oil usage, production expansion, and a larger pool of medical patients.
As you can imagine, Cronos also honed in on its game-changing deal with Altria. The company ended 2018 with "only" CA$32.6 million ($24.4 million) in cash, and the completion of Altria's investment now gives the company more than $1.8 billion to work with as it aims to boost its international presence, diversify its product line, market its brands and build engagement with consumers, and potentially increase its production capacity. Not to mention, Cronos now gains access to Altria's marketing knowledge as it looks to move its products into new channels and countries.
Cronos also made sure to highlight a number of partnerships struck in 2018, such as its cross-border joint venture with upscale vertically integrated dispensary-chain MedMen Enterprises and its up to $100 million deal with Ginkgo Bioworks to develop cannabinoids using Ginkgo's microorganism platform, as opposed to traditional extraction techniques.
This confirms it: Cronos is grossly overvalued
However, if investors look beyond the grandiose year-over-year percentage growth in sales and Altria's investment in the company, they'd see that Cronos Group's fourth-quarter and full-year results were anemic, at best.
Think about this for a moment: Canada just legalized recreational marijuana, opening the door for tens of millions of adults to purchase cannabis, and all Cronos could muster was a measly $4.2 million in sales. By comparison, Aurora Cannabis (NYSE: ACB) and Canopy Growth (NYSE: CGC), the projected two largest producers by peak annual output, reported net fourth-quarter revenue (i.e., gross sales less excise tax) of CA$54.2 million ($40.5 million) and CA$83 million ($62 million), respectively.
More so than just net revenue, Aurora Cannabis will be producing at an annual run rate of more than 150,000 kilos by the end of this month, while Canopy Growth has more than 4.3 million square feet of its 5.6 million square feet spanning 10 facilities licensed by Health Canada. As for Cronos, most of its projects, including its 850,000 square foot joint venture known as Cronos GrowCo, and most of its overseas grow sites, won't complete construction until mid or late 2019. In other words, peers like Aurora and Canopy are miles ahead of Cronos in terms of production, and it shows.
Cronos has also done a poor job of pushing into foreign markets. The company's Israeli joint venture is under construction, and the manufacturing facility won't be complete until the latter half of this year. Meanwhile, distribution partnerships in Germany and Poland are the only real highlights of the company's international sales channels.
Cronos is losing quite a bit of money, too. Gross profit, prior to fair-value adjustments of biological assets, was CA$8 million ($6 million) for the full year, while operating expenses more than tripled, to CA$29.4 million ($22 million). That's an operating loss of CA$21 million, which was almost 10 times higher than what the company reported for the full year in 2017. With the company's production ramp-up progressing much slower than its peers, Cronos could struggle to generate a meaningful profit.
And if that's not enough to scare you away, this is a company that still threatens to dilute shareholders, even with its equity investment from Altria. Cronos ended the year with 12.9 million stock options and 25.5 million warrants outstanding that, if exercised, would push its outstanding share count higher. Plus, the company's joint venture with Ginkgo allows it to dispense its common stock to Ginkgo in tranches based on cannabinoid production milestones being met.
In sum, there's absolutely no way that investors can justify a $3.6 billion market cap for Cronos given its subpar metrics. If you're looking to dip your toes into the pond to take advantage of the industry's rapid growth, I'd suggest keeping your distance from Cronos Group.
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