Is Cronos Group Stock Too Expensive to Buy?

Are you up to the challenge for a marijuana stock trivia quiz? Here are two questions for you:

1. What is the best-performing marijuana stock of all time?
2. What is the best-performing stock among major Canadian marijuana producers so far in 2019?

If you answered Cronos Group (NASDAQ: CRON) both times, pat yourself on the back. Cronos is indeed the best-performing marijuana stock ever and has outperformed all of its rivals so far this year.

But the old saying that success breeds contempt appears to be at play for Cronos. Several analysts have downgraded the stock. And Cronos Group's share price has been in a holding pattern for several weeks. After its meteoric rise, is Cronos now simply too expensive to buy?

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The lowdown on the downgrades and downbeat assessments

Probably the most damning of the analyst downgrades for Cronos Group came from BMO Capital Markets. Last week, BMO analyst Tamy Chen downgraded Cronos from a market-perform rating to an underperform. Her primary concern was valuation. Chen wrote to clients that Cronos traded at 85 times her estimated EBITDA -- well above its peers.

Only a few weeks earlier, GMP Securities downgraded Cronos from buy to hold, causing the marijuana stock to sink. GMP Securities analyst Martin Landry wrote to clients that "shares needed a breather" after Cronos Group's strong gains.

A couple of other analysts initiated coverage on Cronos Group recently with lackluster enthusiasm. On Feb. 25, Jefferies initiated coverage of Cronos with an underperform rating. Jefferies' Owen Bennett noted that "the market has gotten ahead of itself" on the stock.

On March 5, Cowen and Company initiated coverage on Cronos with a market-perform rating, reflecting a neutral stance on the stock. Cowen analyst Vivien Azer said that her firm would "look for a more attractive entry point" before considering buying Cronos.

Too expensive?

It seems as though nobody likes Cronos Group very much at its current price. But is Cronos Group really all that expensive compared to other marijuana producers?

We can't use earnings multiples for Cronos nor for most other marijuana stocks, because they're not consistently profitable yet. We can, however, compare the price-to-sales (P/S) ratios for the stocks. And Cronos is definitely a lot more expensive, with a P/S ratio of 404 versus multiples of 97, 84, and 214, respectively, for Canopy Growth, Aurora Cannabis, and Tilray.

Note, though, that all of these P/S ratios are based on historical sales. However, with the fast-changing landscape in global marijuana markets, historical sales levels are pretty much meaningless for Cronos and its peers.

We could take the approach that BMO analyst Tamy Chen used and look at current prices versus estimated EBITDA. But that requires a lot of guesswork that may or may not be accurate. And there's still the issue that estimating out only one year wouldn't provide a great picture because marijuana markets are expanding so quickly.

One method that I've used in the past is comparing the stocks of marijuana producers by a ratio of market cap to projected production capacity. Using this measure, Cronos is significantly more expensive than Aurora, but is close to the valuations of Canopy and Tilray.

Even this approach, though, has a drawback since production capacities can quickly change. It's quite likely that's exactly what we'll see with Cronos now that it's flush with cash after the closing of its deal with tobacco giant Altria (NYSE: MO).