In the span of a month, Altria (NYSE:MO) has spent more than $14 billion buying a 45% stake in Cronos (NASDAQ:CRON) and a 35% interest in privately held Juul Labs, delivering early Christmas gifts to shareholders of both CRON stock and Juul’s private investors.
Compared to Juul Labs, I believe Altria got a steal investing in Cronos Group. Here’s why.
The Cannabis Market
There’s no question the global cannabis industry is a crapshoot at the moment, as companies like Cronos stake their claims on what’s expected to be the biggest thing since the technology boom of the late 1990s.
In the U.S. alone, the demand (legal and black market) for recreational marijuana is estimated to be between $50-55 billion putting it ahead of video games and firearms and within $30 billion of cigarettes, which got a 400-year head start on the wacky weed.
I’m not sure if Marijuana Business Daily’s estimate includes edibles and cannabis-infused drinks. Either way, it’s a significant number.
It’s why companies like Altria and Constellation Brands (NYSE:STZ) are making significant investments in Canadian cannabis companies.
Investors can expect more of them in the future.
The E-Cig Market
According to Wells Fargo (NYSE:WFC) analyst Bonnie Herzog, U.S. e-cig sales are expected to hit $6.6 billion in retail sales in 2018, with Juul generating 76% market share.
Optimistic estimates suggest the global market for e-cigarette and vaping products should hit almost $50 billion in annual sales by 2025.
Considering the U.S., the world’s largest market for smokeless tobacco and vape products, is seven times larger than Japan, the next biggest market, and the U.S. only generates $6.6 billion annually in e-cig sales, I find it hard to believe that global sales will reach anywhere close to $50 billion by 2025.
The Price Paid for Both Investments
Altria paid $1.8 billion for 45% of Cronos with an option to increase its ownership stake to 55% for an additional $1.1 billion, giving it majority control of the Canadian cannabis company.
With Juul, Altria paid $12.8 billion for a 35% stake, giving Juul a $38 billion valuation, higher than many of the tech companies like Airbnb and Uber, which are expected to go public in 2019.
That’s not bad for a company that has revenues of $1.5 billion, little hope of growing its U.S. market share beyond the current 76% and is likely losing a lot of money to dominate the e-cig market in the U.S. and elsewhere.
While Cronos doesn’t have anywhere near $1.5 billion in revenue — the cannabis company had just CAD$3.8 million in its most recent quarter — it gives Altria a platform for growth in a market that’s destined to be much bigger on a global basis than e-cigs could ever hope to be.
The Bottom Line on CRON Stock
The 35% investment in Juul is Altria’s way of covering all of its bases as it prepares for the day when no Americans smoke cigarettes.
Like a big trade by a professional sports team, Juul might have been the expensive star player, but Cronos could be the steal of the deal for Altria shareholders.
If you own CRON stock, I’d stay long. Altria’s involvement is a blessing, not a curse.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
