When it comes to pot stocks the Cronos Group (NASDAQ:CRON) appears to have a different approach, but Cronos stock still is following the pot stock trend, and this is a problem.
Like all the marijuana stocks now crowding the market, its revenues, assets and cash flow bear no relation to the business it’s doing. It’s all speculation,
I once smoked pot, and on a recent Colorado vacation, I got the chance to see legal pot. This is not your father’s marijuana. It’s clean, it’s colorful, with no stems nor seeds that you don’t need, but it’s still marijuana. I didn’t get a legitimate dream for weeks after sitting in the second-hand smoke for an hour.
I know that’s not a normal symptom, but marijuana is not a normal substance. It’s complicated.
That’s what Cronos is trying to fix.
Lab Grown Pot
Cronos is working to grow marijuana in a lab, using genetic engineering. It has a partnership with Gingko Bioworks, a Boston-based biotech firm, to transfer some cannabinoid DNA into yeast, and produce the product through fermentation.
This is not just about growing pot cheap. It could also let Gingko and Cronos isolate the specific chemicals found in the plant and produce new pharmaceuticals from them. It could also make Gingko a major partner in Cronos. Their deal is for $22 million in research money and $100 million in Cronos stock once Gingko achieves commercial production.
The complexity of marijuana is one factor opponents point to when they call for maintaining prohibition. Like tobacco, marijuana is a plant with wide-ranging effects, a plant containing substances that work like drugs. It also has unpredictable side effects.
Cronos wants to unlock the chemical properties of marijuana, so it can be properly studied and its constituent parts regulated as pharmaceuticals.
Bigger Gains for Cronos Stock?
By joining the Canadian stock market back in 2016, Cronos stock can also claim the biggest gains of all the pot stocks, 6,500% so far.
Since listing on the NASDAQ in February, the shares have also performed in the slipstream of larger companies like Tilray (NASDAQ:TLRY) and Canopy Growth (NYSE:CGC), which got the market into overdrive after alcohol company Constellation Brands (NYSE:STZ) invested $3.8 billion in it.
As with the other pot stocks, however, the valuation the market is currently putting on Cronos has no relation to the business it’s doing.
Cronos entered trading Oct. 1 at a valuation of $1.965 billion. This for a company with 2018 sales, through two quarters, of $6.2 million, and $4 million in 2017, with total assets of $102 million and no operating cash flow.
All these numbers are at least a factor of 10 away from the valuation. This is true for all the pot stocks, which are going through the same speculative frenzy we saw last year with cryptocurrency. That’s why I call Cronos Ethereum. It’s just like Canopy or Tilray but has features it claims make it different. That doesn’t mean it won’t trade in line with those other stocks. It will.
The Bottom Line on Cronos Stock
If you believe in pot stocks, you’re welcome to believe in Cronos, and allow its different approach to justify your choice.
But the fundamentals of the group are moving in lockstep, and will continue to do so until financial results, or a crash, cause investors to be more selective.
When that happens Cronos may become a standout, but it must be at much lower levels to be a legitimate bargain. If you want Cronos’ results to justify its current valuation you’re going to have to wait for it.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.
