Cronos Australia Offers Little Help to Cronos Group Stock

A venture partially owned by Cronos Group (NASDAQ:CRON) will list publicly in Australia. Cronos Australia, also backed by NewSouthern Capital, will launch on the Australian Stock Exchange in November. This could help Cronos Group long term as it seeks to boost its visibility outside of North America. However, any benefit to CRON stock will probably take a long time to come, if it appears at all.

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Cronos Group helps to run its Australian counterpart in what it describes as a “50-50” joint venture. The company will offer 40 million shares at 50 cents AUD per share. At the IPO price, the deal gives Cronos Australia a market cap of $64.4 million AUD. Despite calling it a “50-50” deal, Cronos Group will own a 31% stake in this venture.

It remains unclear how much Cronos Australia will help CRON stock. Cronos Australia also bills itself as a medicinal cannabis company. Other than in the Australian Capital Territory, recreational weed remains illegal in the “Land Down Under.”

Still, this deal gives Cronos a segue by which it could become the leading provider of medical cannabis in Australia. With a national population of approximately 25 million, it would constitute a market of about two-thirds the size of Canada. Potentially, it could also extend this reach across the Asia-Pacific region. Cronos will also import its Peace Naturals brand, which the company sells in Germany and its native Canada.

The market cap of Cronos Australia pales in comparison to the roughly $3.2 billion market cap of the Cronos parent company. However, it lends credibility to a company that lags Canopy Growth (NYSE:CGC), Aurora Cannabis (NYSE:ACB), Tilray (NASDAQ:TLRY) and even firms such as Aphria (NYSE:APHA) in production.

Analysts tend to associate CRON stock with Canada’s top players due to the investment from tobacco giant Altria (NYSE:MO). If Cronos Australia becomes the leading provider of medical weed in Australia, that could help to change perceptions.

Expect Few Near-Term Effects on CRON Stock

While I think this venture helps Cronos Group, how it helps CRON stock remains unclear. At less than 2% the size of the parent company, it appears too small to significantly affect the firm’s financials at this time. Still, Cronos Australia should grow quickly, and it might boost overall profits in later years.

Moreover, as I stated in a previous article, the benefits of the Altria investment entail more than cash. Since Altria has thrived in a related industry, Altria’s cultivation, production, sales and marketing experience should help Cronos Group boost revenue and reduce costs. That body of knowledge should presumably bolster the Australian operation as well. In time, I think it will turn both Cronos Australia and Cronos Group overall into the “Altria of cannabis.” This could eventually lead to profits and dividends.

For now, CRON stock has begun to make the transition away from a speculative growth stock. CRON now trades at around $9.50 per share. While that is only $3 off its 52-week lows, Cronos could fall much further. A trailing price-to-sales ratio of nearly 105 still points to an elevated valuation. Although Cronos Australia may help CRON long term, it does little to change the value proposition in the immediate future.

The Bottom Line on Cronos Group Stock

The Cronos Australia IPO could help the reputation of Cronos Group, but will not benefit Cronos Group stock, at least for now. Cronos Australia could help Peace Naturals become the best-selling medical marijuana brand in a potentially lucrative but often-forgotten market.

However, approaching its IPO, Cronos Australia is less than 2% the size of its parent. This indicates the performance of the joint venture will have little effect on the CRON parent in the near term.

Still, CRON stock has claimed “top-tier” status more for its ties to Altria than for its size. Achieving the goal of becoming Australia’s premier medical weed provider lends the company some much-needed credibility. I also think it can help Cronos Group stock once it becomes more of an income generator.

For now, Cronos Australia is not a reason to buy CRON stock, but it is certainly a reason to keep watching Cronos Group.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

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