Think Cronos Stock Deserves Its Premium Valuation? What Are You Smoking?

Luke Lango - finance.yahoo.com Posted 5 years ago
image

In early February, the “Hot Pot Stock of the Year” award would’ve gone to Canadian cannabis producer Cronos Group (NASDAQ:CRON), no questions asked. Four months after Canada legalization, CRON stock was up 120% year-to-date. No other pot stock was up more than 100%.

Think Cronos Stock Deserves Its Premium Valuation? What Are You Smoking?
More

But, some questioned the sustainability of this rally. Broadly speaking, there were concerns that a $1.8 billion investment from global tobacco giant Altria (NYSE:MO) wasn’t enough to warrant what had turned into a premium valuation underlying CRON stock.

Fast forward two months. In early April, those concerns have reared their ugly head. CRON stock has dropped more than 20% off its February 2018 highs, and is no longer the best-performing big name marijuana stock of 2019. Instead, that title now belongs to Aurora Cannabis (NYSE:ACB), which is up more than 80% year-to-date to CRON’s 75% year-to-date gain. Canopy Growth (NYSE:CGC) isn’t too far behind at a 65% increase in 2019.

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

So, CRON stock went up big in early 2019, and has since retreated meaningfully amid a broader cooling across the cannabis industry. What now?

The stock will likely keep retreating. Across every valuation metric you could possibly find, CRON stock is still way overvalued relative to its peers. This premium valuation is not warranted. Sure, the company has $1.8 billion in the pipeline from Altria. But, Canopy got more than twice that from Constellation Brands (NYSE:STZ), and still has $3 billion in cash on the balance sheet. Plus, Cronos is growing at an underwhelming rate relative to peers, and nothing about this company says “special” enough to warrant a huge valuation premium.

Simply put, CRON stock still isn’t worth buying here. Other pot stocks, such as CGC and ACB, look far better at the moment.

Valuation is Still Extended

Despite dropping more than 20% since early February, CRON stock is still overvalued relative to peers. In fact, it’s still way overvalued relative to peers.

Here are the numbers:

  • Cronos has a $6 billion market cap, and sold just over 1,000 kilograms of cannabis last quarter. Thus, each kilogram of cannabis sold last quarter at Cronos is being valued at $6 million. Over at Canopy and Aurora, each kilo of cannabis sold last quarter is being valued at $1.3 to $1.5 million.
  • Annualized, last quarter’s revenue was just over $4 million, or just shy of $17 million annualized. That means CRON stock has an annualized most recent quarter revenue multiple of roughly 360x. For CGC stock, that multiple stands at 59x. For ACB stock, it is 42x.
  • If you consider that there’s $1.8 billion coming from Altria very soon, then the enterprise value for Cronos is roughly $4.2 billion. Using enterprise value as the numerator as opposed to market cap (so as to account for the big Altria investment), then the per kilogram valuation for Cronos is $4 million. Over at Canopy and Aurora, it’s $1.2 million to $1.3 million.
  • CRON stock has an enterprise value-to-revenue multiple of 250x, using last quarter’s annualized revenue rate. For ACB and CGC, that same multiple hovers in the 40’s.
  • CRON stock trades at 33 times one-year forward sales. ACB and CGC stock trade around 13-14x one-year forward sales.

The evidence here is irrefutable. No matter which metric you look at (revenues or volumes), and regardless if you look forward or backward, CRON stock is the most overvalued big name marijuana stock in the market.

Premium Isn’t Warranted

Long story short, the valuation premium supporting CRON stock is not warranted.

This company isn’t the biggest player in the space. Cronos sold just over 1,000 kilograms of cannabis last quarter. Aurora sold seven-times that. Canopy sold 10-times that. Annualized, both Canopy and Aurora are $200 million-plus revenue companies. CRON’s annualized revenues don’t even break north of $20 million.

Meanwhile, Cronos isn’t the fastest grower in the space. Last quarter, volume growth was ~200% and revenue growth was ~250%. Those are good growth numbers. But, they are underwhelming relative to peers. Canopy and Aurora both reported volume growth in excess of 300% and revenue growth in excess of 280%, on much larger bases.

Cronos also doesn’t have the strongest balance sheet. The $1.8 billion investment from Altira is a very powerful asset, and puts the company in a favorable investment position relative to both Aurora and Tilray. But, Aurora is raising a bunch of money, and could have a billion dollar-plus cash balance soon. Meanwhile, Canopy still has $3 billion in cash on its balance sheet.

Overall, there really isn’t anything terribly special about Cronos as far as marijuana stocks are concerned. Consequently, today’s valuation premium is not warranted. So long as that remains true, CRON stock will likely struggle to break its current downtrend.

Bottom Line on CRON Stock

Pot stocks are a great place to be for the long haul, and if you own CRON stock simply for diversification purposes, that makes sense. But, don’t own Cronos stock alone in the cannabis space. It is far from the best long-term pick.

As of this writing, Luke Lango was long CGC and ACB. 

More From InvestorPlace

  • 2 Toxic Pot Stocks You Should Avoid
  • 9 Stocks That Would Be Hurt By a Mexico/U.S. Border Closure
  • 7 A-Rated Healthcare Stocks for Industry Expansion
  • 10 Stocks That Every 30-Year-Old Should Buy and Hold Forever

Compare Brokers

The post Think Cronos Stock Deserves Its Premium Valuation? What Are You Smoking? appeared first on InvestorPlace.