Just recently, Cronos Group announced their newest quarterly financial results, and while revenue figures grew drastically, markets were somewhat unimpressed by their growing losses the company has seen.
As one of the more overpriced companies in the cannabis sector, such results were not exactly what the company needed if it wanted to justify its already pricey valuation metrics. Now, just one day after releasing these figures, Cronos Group’s brokers have gone on to downgrade the company’s stock to a “sell” rating.
Analysts at Canaccord Genuity, Matt Bottomley and Bobby Burleson, went on to justify their new rating due to the company’s sky-high multiples and lacking profitability as failing to justify the high values of these metrics.
“We are lowering our recommendation to sell primarily on valuation. We believe CRON’s valuation was somewhat stretched at Altria’s investment price of $16.25,” wrote Bottomley. “Cronos has seen its share price almost double as one of only two licensed producers to receive a significant equity investment from a global strategic partner.”
Canaccord now expects 2019 sales and cash flow to come out to around $84 million and $16 million respectively, as opposed to the previously expected $132 million and $41 million. In 2020, analysts expect this figure to grow to $187 million revenue and $64 million in cash flow.
“We are left wondering why investors hang on. In our view, investors expect CRON to enter into the U.S. market for hemp-derived CBD products . . . However, one can make a strong case that such a scenario appears already priced into the stock given Cronos’ valuation at 35x 2020 sales, 3x higher than peers. Only $1.6 million of the company’s inventories at year end was finished and ready to ship, indicating that packaging and processing is Cronos’ current bottleneck,” wrote the analysts. “Management indicated during the call that improvements were needed in downstream packaging operations to support the company’s expected growth.
One of the main factors pushing up Cronos’ high $25 per share stock price was when tobacco giant Altria Group (NYSE: MO) chose to invest around $1.8 billion for a 45 percent stake in the company. “Cronos has seen its share price almost double as one of only two licensed producers to receive a significant equity investment from a global strategic partner,” added the two analysts. However, it’s hard to see this justifying the fact that Cronos currently trades at around 92-times their estimated 2020 cash flows, whereas most cannabis companies with stronger sales records are trading at around 40-times.
In response to this development, shares of Cronos Group dropped almost 10 percent on the NASDAQ.
Cronos Group Company Profile
Cronos Group Inc is a diversified and vertically integrated cannabis company. Its principal activities involve production and sale of cannabis in federally legal jurisdictions, including Canada and Germany. It sells dried cannabis and cannabis oils under its medical cannabis brand Peace Naturals. The firm seeks to invest in companies either licensed or actively seeking a license, to produce medical marijuana pursuant to Canada’s Marijuana for Medical Purposes Regulations. – Warrior Trading News