Investing in Cannabis company Cronos Group (NASDAQ:CRON) isn’t an investment in what it’s doing now. Rather it is an investment in what the company might become in the future, as it rides the global wave of marijuana legalization. Amazon.com (NASDAQ:AMZN) was overvalued and bleeding money in its early days too, and look how well that trade turned out. But Cronos stock isn’t Amazon stock.
As a guy who was actually in this business when Amazon was conceived though, I’ll gently remind those who weren’t around at the time that for every Amazon that made it out of the dot-com bust, there were several names like Pets.com, Flooz, GeoCities and eToys, just to name a few that didn’t make it. The mob was just as bullish on those names as they were on Amazon at the time.
Point being, while many argued against my May 7 bearish thesis on Cronos Group, the argument still stands. It remains to be seen which, if any, of the hot marijuana stocks will still be standing and recognizable a few years from now. Of the ones with the best odds of doing so though, Cronos Group isn’t among them.
And a lot of other people are expressing eerily similar concerns.
The Numbers and Cronos Stock
Don’t misread the message. Last quarter’s $6.5 million in revenue is only a fraction of what Cronos is capable of producing, just as last quarter’s 1,111 kilograms of cannabis sold is a fraction of what the company says it’s capable of producing.
Leaning on its joint venture Cronos GrowCo along with its wholly-owned subsidiary Peace Naturals, Cronos reports it is capable of yielding 120,000 kilograms of cannabis per year. Cronos GrowCo alone boasts 850,000 square feet worth of growing space. That estimate may not yet include the capacity from its joint venture with Colombian affiliate Agroidea SAS, NatuEra, which in March finally received its growing license.
With or without NatuEra in the mix, however, that sort of output potential still pales in comparison to names like Aurora Cannabis (NYSE:ACB) or Canopy Growth (NYSE:CGC), which are capable of producing 700,000 and 550,000 kilograms of dried marijuana per year, respectively, as they stand right now.
The curious part? Cronos stock currently sports a market cap of $5.1 billion, versus Aurora’s $8.4 billion despite the fact that Aurora Cannabis can produce nearly six times as much marijuana.
And it’s not as if Cronos is somehow closer to profitability than any of its rivals. Last quarter’s $6.5 million in sales was still tainted by an EBITDA of negative $9.0 million. Scaling up, at least initially, could drag the company even deeper into the red; adding production capacity in order to grow revenue isn’t cheap, a key detail too many investors are overlooking.
Cronos Stock Has Challenges
CRON stock has been a good performer. In fact, it’s been one of the best-performing marijuana stocks since the market went cannabis crazy last year.
Put it in context though. Marijuana mania took hold even before Canada officially legalized it for recreational use, which means it took hold before anybody had any inkling of any idea how big the market might become. We still don’t know exactly how big the market for legal cannabis is.
Speculators knew enough to know they wanted to take a shot.
It’s not the first time such a prospect has prompted investors to jump in with their eyes wide shut. An army of investors were convinced low-cost 3D printers would revolutionize the manufacturing landscape in 2013, spurring sharp rallies from names like 3D Systems (NYSE:DDD) and Stratasys (NASDAQ:SSYS).
That 3D printing revolution never took shape the way it was supposed to, of course, and DDD as well as SSYS are now nowhere near their 2013 peaks. Investors were certain at the time, however, the craze was a “can’t miss” kind of phenomenon.
It’s not unlike the marijuana stock craze we’re seeing now. People are making production and earnings claims even before anyone has a reasonable means of evaluating them. When the back-story is exciting enough, traders will fill in the blanks themselves. They usually do so with the most optimistic of numbers, from the most optimistic vantage point.
They may look back and realize they’ve done this with Cronos stock, but with profits to protect, they’re certainly not going to point it out.
Bottom Line for Cronos Stock
So again, I stand by my thesis, even as CRON stock continues to mostly climb.
As I suggested above though, I’m not alone. The Motley Fool’s Sean Williams noted earlier this month, “Cronos has proved time and again that it is, hands-down, the most overvalued pot stock.”
Bank of America Merrill Lynch analyst Christopher Carey recently initiated coverage of four marijuana stocks, calling three of them a “Buy” and one of them a “Sell.” His “Sell” call was in Cronos stock. Our very own Luke Lango just explained how “the bull thesis for CRON stock still lacks conviction.”
It’s simply an awful lot of doubt surrounding one single stock, mustered by a crowd that’s willing to be bullish on all of that stock’s peers. It’s difficult to say there’s not something to it.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.