Cronos Group (NASDAQ:CRON) stock remains overvalued. Despite cannabis sector’s summer selloff, CRON stock still trades at a premium to peers. But with recent acquisitions, the company’s future prospect may start to meet expectations. Last month’s acquisition of several U.S.-based CBD businesses could help bolster the company’s growth strategy.
Is there opportunity with Altria Group (NYSE:MO) backed Cronos? Or should investors seek cannabis plays elsewhere? Let’s take a closer look at Cronos Group stock.
What’s The Latest at CRON?
In August, Cronos Group purchased 4 U.S.-based CBD businesses from Redwood Holding Group. The most notable asset purchased in this deal was the Lord Jones brand of CBD-infused skincare products. In the U.S., marijuana has yet to be legalized on the federal level. But CBD is fully legal. Gaining a toehold in the American market via CBD is just the first step.
But Capitol Hill is moving slow on legalization. Without access to banking services, “Big Pot” in the United States remains a pipe dream (for now). This didn’t stop Altria Group from making a big bet on Cronos. Altria (parent of Phillip Morris USA and a major investor in vaping giant Juul) made a $1.8 billion investment. This gave the tobacco giant a big seat at the table.
The relationship with Altria helps Cronos with their vaping product strategy. But the health effects of vaping have dominated the headlines. However, as InvestorPlace contributor Josh Enomoto wrote on September 10, the “vaping crisis” could cool down over time. But with these challenges, its tough to see a clear path to profitability. With the stock trading at such a high enterprise value/sales ratio, Cronos needs to hit it out of the park to “grow into its valuation”.
Cronos Remains Extremely Overvalued
CRON stock continues to trade at a premium. The company’s enterprise value/sales (EV/Sales) ratio is a staggering 109.9. For comparison, Aurora Cannabis trades at an EV/sales ratio of 51.6. Canopy Growth shares change hands at a EV/sales ratio of 40.1. Tilray (NASDAQ:TLRY) has an EV/sales ratio of 32.9. Aphria (NYSE:APHA) sells at a relatively reasonable EV/sales ratio of 9.8.
Is Crono’s premium valuation all thanks to Altria? Having America’s biggest tobacco company on your side is a plus. But it is no guarantee of U.S. market domination. The deal was highly dilutive for Cronos shareholders. Altria received a slug of warrants along with their investment. These warrants have a strike price of $19/share. This is well above Crono’s current price of $11.73/share. But the high amount of warrants outstanding minimizes upside.
But this deal gave Cronos plenty of capital. As of June 30, 2019, CRON had CAD $1.6 billion in cash, and CAD $745 million in short-term investments. Even after the recent asset purchases, the company has plenty of money to fuel growth. Additional capital raises are unlikely. The company is operating at a loss. But it is not hemorrhaging money as quickly as its peers. This means downside is limited. But with upside challenges, it is tough to see the value in CRON stock.
Look Elsewhere For a Pot Play
I am still waiting for pot stocks to reach lower valuations. But you may be more keen on placing a bet on the cannabis sector. If you are looking for a pot play, look at any other stock but Cronos. The company continues to trade at a mind-boggling valuation. It has a logical strategic partner (a tobacco company). But it remains unclear how this will translate into a market edge.
I have been bearish on both Aurora Cannabis and Canopy Growth. But at least both of these companies offer a clearer path to success. Among the other major marijuana stocks, companies like Aphria stand out for their reasonable valuation.
It may pay to take your time with marijuana stocks. Valuations could reach more reasonable valuations down the road. But if you are looking for a pot play today, look at anything else but Cronos Group stock.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities