From the looks of Cronos Group, Inc. (NASDAQ:CRON) on the charts, the stock looked like it topped around $13 and is on the way down. Even though the trading patterns will not predict where the stock will go, its nearly sixfold return from yearly lows already rewarded shareholders in a short amount of time. So with CRON stock down around 13% in the week, should investors buy this marijuana company again on the dip?
On Sept. 4, Cronos announced a partnership with Ginkgo Bioworks. It will produce cultured cannabinoid, the active ingredient produced in cannabis plants. At present, cannabinoids make up under 1% of the dry weight of the plant. They cannot get produced commercially through traditional cultivation. The two companies want to lower the cost of its production, create commercial scale and give the market the ability to access rare cannabinoids.
Ginkgo Bioworks has the expertise in organism design and development. In return for access to this technology, Ginkgo will get shares of Cronos when milestones are met. And with that lies the risk. Remember the days when 3D printing companies would acquire other companies and their patents by paying for them through shares? Cronos could risk diluting shareholders through such deals. Yet, at a market capitalization of $1.8 billion, the company will scale its business and grow revenue if the partnership bears fruit. If Ginkgo does not meet various milestones, it will not get any share ownership reward from Cronos.
What Ginkgo Does for Cronos
Ginkgo will develop eight target cannabinoids for production using yeast and through an industrial fermentation process. Operationally, it aims to produce a good yield at costs well below the industry norm — $1,000 USD per kilogram. Cronos will own the right to use and to commercialize whatever intellectual property is involved. The total compensation to Ginkgo, if all eight target cannabinoids are met, is 14.67 million shares.
Macro Headwinds
On Fri., Sept. 14, markets started getting nervous over the valuation of marijuana stocks. Tilray, Inc. (NASDAQ:TLRY) fell by around 14% intraday, but do not feel sorry for shareholders. The stock is up nearly 50% on the week and fourfold in the month alone. In the U.S., the House is about to vote in favor of the Medical Cannabis Research Act of 2018. This could sharply expand the number of licenses that allow for the domestic production of marijuana for research use.
Valuation
Investors should exercise caution with Cronos stock and marijuana stocks in general. Valuations are unfavorable at this time and are mostly trading in anticipation of significant growth ahead. Pay too much now for Cronos stock and investors would risk trading losses if the forecasts do not materialize. Cronos trades at over 10 times sales, whereas a pharmaceutical stock like Pfizer Inc. (NYSE:PFE) trades at 3.6 times. Johnson and Johnson (NYSE:JNJ), a drug manufacturer trades at around six times sales.
Takeaway on CRON Stock
Cronos could consolidate back to the $6 range, bellowing its moving averages, if markets turn sour on the marijuana stock.
Trading CRON stock could pay off. For investors looking for a buy and hold entry point, it might be better to wait a little longer.
Chris Lau does not own shares in any of the companies mentioned.
