The hottest marijuana stock in early 2019 was Cronos Group (NASDAQ:CRON). CRON stock rallied tremendously in early 2019 after the company scored a multi-billion dollar investment from global tobacco giant Altria (NYSE:MO).

That investment put Cronos stock in unique company; the only other cannabis producer to score such an investment thus far is Canopy Growth (NYSE:CGC), and CGC, with a a $15 billion market cap, is widely considered the 800-pound gorilla of the cannabis world. In late 2018, Cronos stock had a $2 billion market cap.

So the owners of CRON stock were euphoric about the Altria investment. They took it as a sign that Cronos now had the necessary firepower and resources to become a very big and important player in the cannabis market. Consequently, CRON stock rose from $10 in late 2018 to $25 by early March 2019.

But Cronos hasn’t delivered on the hype. Instead, the company reported subpar early 2019 numbers which basically affirmed that Cronos isn’t gaining share like investors had expected it to. As a result, CRON stock has fallen over the past few months. Today, its shares trade hands for about $16.

The problem is that CRON stock is still far more richly valued than all of its peers. Thus, the stock price still indicates that the company will start generating strong growth in the foreseeable future. But current trends imply that such a rebound is unlikely to materialize.

So Cronos stock should be avoided until CRON’s higher growth does materialize because right now  CRON offers too much risk and not  enough reward.

Cronos Stock Is Still Overvalued Relative to Its Peers

Although CRON stock presently trades almost 40% off its 2019 highs, the stock is still overvalued relative to its cannabis peers. Further, there doesn’t seem to be any good reason for the premium valuation of Cronos Group stock.

Cronos has a market cap of $5.2 billion. The company sold just over 1,100 kilograms of cannabis last quarter. That means each kilogram of cannabis sold last quarter by Cronos is being valued by the market at roughly $4.7 million. That number ranges between $800,000 and $1.5 million for the three other big players in the Canadian cannabis market  – Canopy, Aurora (NYSE:ACB), and Tilray (NASDAQ:TLRY) . Those three companies are trading at a average valuation of $1.3 million. per kilogram Thus, on a per-kilogram basis, the valuation of CRON stock is 260% higher than  its peers.

Why is Cronos stock getting a premium valuation? It has nothing to do with size. Cronos is much smaller than Canopy, Aurora, and Tilray. It also has nothing to do with growth. Last quarter, Cronos reported the slowest year-over-year revenue growth in the group. Nor does it have anything to do with U.S. market expansion, as Cronos hasn’t announced anything too special on that front, while Canopy looks positioned to dominate the U.S. market with its Acreage acquisition.

CRON stock has a premium valuation because of the $1.8 billion investment it received from Altria. But CRON stock’s enterprise-value-to-expected-2020-sales multiple is around 25, versus an average of 15 for CGC, ACB, and TLRY.

That $1.8 billion of cash could fuel acquisitions, expansions, and stronger growth. But that isn’t happening yet. Until it does happen, CRON stock simply appears overvalued relative to its peers.

CRON’s Long-Term Fundamentals Don’t Support Its Current Valuation

The bigger problem with Cronos stock is that it appears overvalued relative to its long-term growth prospects.

Cronos is a small player in the Canadian cannabis market. In the fourth quarter of 2018, the sales of the legal Canadian cannabis market were worth around $150 million. Cronos reported revenue in that same quarter of roughly $4.2 million. Thus, Cronos commanded market share of about 3%. Given analysts’ consensus projections regarding Cronos’ sales and the Canadian cannabis market, it looks like most experts expect Cronos’ market share to remain about 3% for the foreseeable future.

On a global scale, that market share will assuredly come down as more competitors enter the cannabis sector. Thus, CRON’s longer term market share in the $200 billion global cannabis market could be about 2%. That implies long-term revenue potential of $4 billion. Gross margins in the industry should hover around 55%, which is roughly where alcoholic beverage makers’ gross margins stand today. CRON’s operating spending rates should fall as it grows and will likely moderate around 30%. Thus, its longer term operating margins could be 25%. Assuming it generates $4 billion of revenue, it should have $1 billion of operating profit.

After taking out 20% for taxes, its net profit would be $800 million. Based on a market-average 16 multiple, the long-term valuation target for Cronos stock is $12.8 billion.

That will all take a long time to occur. Most industry insiders and analysts expect its growth to play out over 10 to 15 years. At the midpoint, that’s about 12.5 years. After discounting that $12.8 billion valuation target back by 10% per year over 12.5 years, the present valuation target for Cronos stock comes out to less than $4 billion.

CRON stock has a market cap above $5 billion today. Thus, until this company uses the $1.8 billion on its balance sheet to supercharge its growth and boost its growth outlook, CRON stock looks overvalued today.

The Bottom Line on CRON Stock

There is a valid argument for why CRON stock should be worth a lot more than it is today. But that argument relies on Cronos doing something it hasn’t done yet: using the $1.8 billion on its balance sheet to materially gain market share in Canada and lay the groundwork for higher share in international markets.

Until that happens, CRON stock will remain a “high risk, low reward” name, meaning that Cronos Group stock is best avoided for the foreseeable future.

As of this writing, Luke Lango was long CGC and ACB.