Cronos: What’s the Word on Wall Street?

Sirisha Bhogaraju - Author

Sep. 3 2019, Published 11:56 a.m. ET

Cronos Group (CRON) reported its second-quarter results last month. Despite better-than-expected sales, the company’s second-quarter losses widened. Cronos was also in the news last month due to its acquisition of the hemp-based CBD (cannabidiol) platform from Redwood Holding, including the Lord Jones premium brand.

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Analysts’ activity after CRON’s Q2 results

Following its second-quarter results, Canaccord Genuity upgraded its rating for Cronos to “hold” from “sell” on August 9. It also raised the price target for Cronos stock to 17 Canadian dollars from 16 Canadian dollars. Also, PI Financial upgraded its rating for Cronos to “buy” from “neutral” but kept the price target intact at 22 Canadian dollars.

According to the August 11 Cantech Letter, PI Financial analyst Jason Zandberg upgraded his rating for Cronos following a significant decline in its stock price in the last few months. Plus, Zandberg raised his fiscal 2019 and fiscal 2020 revenue forecasts for Cronos but lowered his EBITDA estimates. In general, continued investments in R&D and the supply chain are expected to weigh on Cronos’s earnings.

On August 30, seven out of 12 analysts rated Cronos stock as a “hold.” Three analysts had “buy” recommendations, while two rated it as a “sell.”

Q2 performance and the company’s outlook

Cronos’s net revenue increased 202% year-over-year to 10.2 million Canadian dollars in the second quarter. This growth reflected the impact of legalization of the adult-use market in Canada. Its revenue grew 58% quarter-over-quarter due to higher CBD oil sales and an increase in the sales of dry flowers.

Despite higher sales, the company’s adjusted EBITDA losses widened to 17.8 million Canadian dollars in Q2 2019 compared to 2.4 million Canadian dollars in Q2 2018. Continued investments in infrastructure and other growth initiatives hurt the bottom line.

The company reported second-quarter EPS of $0.22 due to a $263.9 million gain related to the revaluation of derivative liabilities. In comparison, the company reported break-even EPS in Q2 2018.

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During its second-quarter conference call, Cronos disclosed that it anticipates the quarter-over-quarter revenue growth momentum to strengthen in the second half of this year. Ramped-up production and higher third-party purchases are expected to boost its top-line growth in the second half. Also, the company expects its adjusted EBITDA loss to increase in the second half of the year due to growth investments and investments in brands and R&D initiatives.

Will Cronos beat analysts’ expectations?

Analysts expect Cronos to generate revenue of 60.1 million Canadian dollars in 2019. This estimate reflected growth of 283% compared to revenue of 15.7 million Canadian dollars in 2018. Analysts expect the company to report EPS of $1.19 in 2019 compared to -$0.11 in 2018.

Recently, Cronos entered into concentrate supply and co-manufacturing services agreements in Canada. These agreements would support the company’s planned launch of derivative products in the Canadian market this fall. Notably, the company is collaborating with third-party producers to supplement its production while still maintaining an asset-light business model.

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Also, the company acquired a GMP-compliant fermentation and manufacturing facility in Canada as part of its diversification strategy. It acquired this facility from Apotex, Canada’s leading generic pharma company. This facility is expected to support Cronos’s R&D partnership with Gingko Bioworks, under which the two entities would produce cultured cannabinoids.

In the second quarter, Cronos launched Cronos Device Labs, an R&D facility in Israel. This facility would help the company develop vaporizer products meant for cannabinoid applications.

Also, Cronos acquired Redwood Holding to expand in the US CBD market. Redwood Holding manufactures and distributes hemp-derived CBD-infused skincare and other products under the Lord Jones brand.

One of Cronos’s key strengths is its strategic partnership with Altria (MO). In March, Altria completed the purchase of a 45% stake in Cronos for 2.4 billion Canadian dollars.

Aside from the financial resources, Cronos benefits in several other ways from the Altria deal. It can leverage Altria’s brand building, product development, manufacturing, and distribution capabilities to grow in the US hemp-based market.

Stock movement and price target

Cronos stock has declined 23% since it announced its second-quarter results in August. Regulatory issues involving certain cannabis companies and weak results of certain peers impacted the movement of Cronos and other cannabis stocks in August. Notably, CannTrust (CTST) violated Health Canada regulations. CTST stock has declined 64% year-to-date through August 30.

On a YTD basis, Cronos stock was up 2.2% on August 30. In comparison, shares of Aurora Cannabis (ACB) and Aphria (APHA) had risen 8.3% and 6.9%, YTD respectively. Canopy Growth (WEED) (CGC) stock was down 14.1% YTD on August 30.

In early August, Aurora Cannabis provided a guidance update for its fourth-quarter revenue. It expects its fourth quarter of fiscal 2019 net revenue to rise about 53%–64% sequentially to 100 million–107 million Canadian dollars.

Aphria reported better-than-expected results for the fourth quarter of fiscal 2019. Its sales rose 75% sequentially to 128.6 million Canadian dollars. Also, Aphria generated positive adjusted EBITDA of 0.21 million Canadian dollars.

Canopy Growth reported weaker-than-expected results for the first quarter of fiscal 2020. Its revenue increased 249% YoY to 90.5 Canadian dollars. However, its adjusted EBITDA deteriorated to -92 million Canadian dollars in the first quarter of fiscal 2020 compared to -22.5 million Canadian dollars in the first quarter of fiscal 2019.

On August 30, the 12-month price target for Cronos stock was 20.3 Canadian dollars. This average price target reflects an upside of about 38%.


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