Cronos Group Stock is Still Expensive Despite Allure of International Plans

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Cronos Group (NASDAQ:CRON) stock is stuck in a rut similar to those of so many cannabis names. Shares of the Canadian medical marijuana company sit almost 60% below their 52-week high and recent price action indicates the market is not yet assigning value to the marijuana name, as highlighted by a decline of about 13% over the past month.

CRON Stock Continues to Lag Due to Several Headwinds
Source: Shutterstock

To be fair, Cronos posted a sales increase during the second quarter, but its negative cash flow position also rose and some analysts continue questioning the company’s position in its home market of Canada. At a time when many marijuana market observers are pointing to the U.S. as the industry’s long-term growth driver, it’s integral for the likes of Cronos Group stock and Canadian rivals to not only efficiently tap their domestic recreational market, but find sources of growth in other non-medical markets.

“We expect the medical market to shrink, as some medical consumers shift into the recreational market,” said Morningstar in a recent note. “However, we forecast the entire Canadian market to grow roughly 20% per year on average through 2030, driven by the conversion of black-market consumers into the legal market and new cannabis consumers.”

The takeaway there is that Canada remains important to the Cronos Group stock thesis, but there are some moving parts and not all of them are dependent on execution by companies like Cronos, Aurora Cannabis (NYSE:ACB) and others.

Fixable Problems

I frequently mention the execution issue when I dive into cannabis companies, but in this industry, there are other matters, such as government involvement, that are out of companies’ hands and act as roadblocks to investors’ outcomes.

This is seen in the U.S. in California. I’m not saying the following because I’m a Californian or because I have a political ax to grind. I don’t, but California should be dominating the U.S. LEGAL recreational market if for no other reasons than that the Golden State produces the best cannabis in the U.S. and there is robust demand here for the product.

However, California’s arcane tax treatment of cannabis — i.e., not realizing that high taxes will curb purchases — sends buyers into the black market. Nearly three years after legalizing recreational weed, California’s black market remains vibrant and significantly larger than the legitimate market.

Canada employs its own out-of-touch treatment to recreational weed that stands in the way of appreciation for the likes of Cronos Group stock. A year after legalization — and a month before the retail green light goes on for edibles and cannabis-infused beverages — Canadian weed users are still fueling a robust black market. More than four in 10 cannabis consumers there buys some of their product illegally, according to Statistics Canada’s National Cannabis Survey.

That presents a domestic revenue hurdle for Cronos Group stock at a time when the company’s only U.S. footprint is via the purchase of Redwood Holdings’ CBD business. Fortunately, there is a potential catalyst for Cronos Group stock in the form of the international medicinal market.

“International medical cannabis exports are a small but growing part of Cronos,” said Morningstar. “At present, Cronos exports into Germany and Poland. The company plans to enter Israel, Latin America, and Australia through joint ventures that it owns 50% or larger stakes in. These joint ventures include local production in Israel, Colombia, and Australia. The global market looks lucrative, given higher realized prices and the growing acceptance of cannabis’ medical benefits.”

Bottom Line: CRON Stock Still Pricey

As a mid-cap growth name, it’s reasonable to expect CRON stock to be somewhat richly valued. However, at about 20x next year’s expected sales and roughly 55x 2020 cash flow, there’s not getting around that this is an expensive name with significant hurdles to clear to justify those frothy multiples.

There are hurdles to profitability, too, because Cronos is spending more on research and development and brand enhancement, endeavors that will likely pinch cash flow over the near-term, but could pay off over the long haul.

That gets investors to a here-and-now scenario with Cronos Group stock that is pretty straight forward: current multiples suggest waiting for the stock to come in a bit before jumping in in the name of value.

Todd Shriber does not own any of the aforementioned securities.

Todd Shriber has been an InvestorPlace contributor since 2014.


Article printed from InvestorPlace Media, https://investorplace.com/2019/09/cronos-shares-are-beaten-up-and-still-not-cheap/.

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