Move could make Cronos hottest pot stock of 2021
Cronos Group (NASDAQ: CRON) has been one of the safest pot stocks to invest in, if only for the sole reason that it is backed by the tobacco giant Altria, which owns a 45% stake in the company. But beyond that, Cronos didn’t give investors much reason to buy. With relatively low sales figures and operating losses in each of the past four quarters, its bottom line is not that impressive.
But now that the company may have an exciting new product line on the way, I think that image might change. The company recently made a game-changing announcement not just for Cronos, but the industry as a whole.
Company to launch lab-grown products
According to Bloomberg, Cronos executive chairman Mike Gorenstein expects his company to offer lab-grown cannabis products as early as this year. The products would be the first of their kind for the industry. And although this is a different way of making cannabis, he says tetrahydrocannabinol (THC) or cannabidiol (CBD) would be the same as what growers are making today, stating that “cannabinoids are the same, no matter what. ‘they come from the plant or from fermentation. “
Lab-grown produce has been on Cronos’ radar for some time. In 2018, he acquired biotechnology company Ginkgo Bioworks for $ 122 million with the aim of creating cultured cannabinoids. And now it looks like that day is fast approaching.
Why this could make the stock a hot buy
For Cronos, this is an exciting development – if there is no difference for the consumer, these products could make the company much more competitive. The big plus is that Cronos could make lab-grown produce for pennies per gram. And keeping costs low is essential to compete with the black market.
Low cost marijuana producer Aphria (NASDAQ: APHA) is one of the most successful companies in the Canadian pot industry, posting seven consecutive quarters of EBITDA. In its January 14 earnings release, the company announced an “all-inclusive” cost per gram of C $ 1.30 for the period ending November 30, 2020. This was a reduction of 7.8% costs compared to the previous quarter.
With products grown in the lab, the cost per gram could be as low as C $ 0.10 per gram, according to a Raymond James estimate. It’s unclear how that would compare to Aphria’s “all-in” costs, but even compared to its cash cost of producing dried cannabis at C $ 0.79 per gram, Cronos would still be much more efficient.
Many companies have introduced valuable brands in order to compete with the black market and gain more market share. Aurora Cannabis launched the “Daily Special” last year, while Tilray, which merges with Aphria, offers consumers “The Batch”, which its Marketing Director Adine Fabiani-Carter has called “a new no-frills cannabis brand focused on providing quality cannabis flowers and pre-rolls at competitive prices.”
Gaining more market share is crucial for Cronos, as over the past three quarters, its net sales have only totaled $ 29.7 million. Aphria did more in its last quarter alone, with net sales of C $ 160.5 million ($ 125.2 million).
Should we invest in Cronos today?
Over the past year, Cronos shares have risen 90%, better than the Horizons Marijuana Life Sciences ETFreturns of 80% during this period. And while there is a lot of excitement surrounding the company right now, especially if its lab-grown produce hits the markets this year, investors should still be careful. Considering its low market share, Cronos is still trading at a very high level. selling price (P / S) multiple compared to the values mentioned above:
The good news is that the ratio can drop quickly if Cronos is able to take advantage of its recent growth. In its last earnings release on November 5, 2020, sales of $ 11.4 million for the period ending September 30, 2020 were double what Cronos generated a year ago. But that doesn’t change the fact that the company still has a long way to go to catch up with its peers.
Cronos’ stock could skyrocket if its lab-grown products hit the market this year and become a hit with consumers. But this is by no means a guarantee. With a high valuation and too many question marks surrounding its business, the title is far from certain at the moment. And that’s why, despite the potential, I would hesitate to invest in Cronos just yet. Until new products are released and there is proof that demand is high, this will still be one of the riskiest cooking pots there given its astronomical price.
This article represents the opinion of the author (s), who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.