As a multinational cannabis business, Cronos Group operates across four continents, with its home market of Canada anchoring most of its operations. Outside of Canada, where it competes in the recreational segment, its focus is on medicinal cannabis, which enables it to compete in lucrative markets like Germany and the U.K.
Aside from its marijuana brand called Spinach, its other two main brands, Peace Naturals and Lord Jones, aren’t particularly well known yet. The company’s steady growth, increasing operational efficiency, and cheap valuation in recent times mean that it is likely to be an attractive opportunity for buying and holding for a period of several years or longer.
Current Market Position and Changes
Cronos’ recent moves, including quitting the U.S. market for hemp-derived CBD in Q2 of 2023 and unsuccessfully attempting to sell off one of its cultivation facilities in Canada, suggest that its positioning today is unlikely to be the same in a couple of years.
While it has ample resources to succeed in its current strategic priorities, it faces significant risks, some of which are unusual for its industry and beyond its control.
Growth Prospects
Per its Q1 earnings report, Cronos is currently experiencing relatively rapid revenue growth. Its sales for the period were $25.3 million, a gain of 30% more than a year prior. Nonetheless, that pace is actually lower than the company’s quarterly average over the last five years. Competing in two markets in particular is driving the additional revenue: Canada and Israel.
Market Performance
Its Spinach brand held a market share of 14.4% in the edibles segment in Q1, down from 15.3% a year prior, marking increasing competitive headwinds while retaining its status as one of the Canadian market’s leaders in the category.
The brand is also one of the leading choices for the dry flower segment, holding a share of 6.5%, down slightly from 6.9% a quarter prior. In total, sales to Canada were worth $18.8 million when adjusted for currency impacts.
Cronos’ Israel operations brought in 27% more revenue than in the same quarter last year, arriving at $6.6 million on a currency exchange-adjusted basis. Its successful dried flower segment was responsible for driving most of the growth. Importantly, the fact that Cronos is competing favorably in the highly competitive dried flower segment in more than one of its major markets indicates that its ongoing efforts to develop better and more appealing strains of cannabis relative to consumers’ preferences are working as intended.
Thus, there is likely more growth on the way in the Canadian and Israeli markets, as well as in Germany, where it is already a major supplier of Canasativa GmbH, a medicinal distributor to pharmacies in the country.
Expansion into New Markets
This year, it also entered the U.K. and Australian medicinal marijuana markets. There hasn’t yet been enough time since launching for it to report a full quarter’s worth of financial information with the proceeds from either operation, though that will soon change.
Beyond those markets, it also has exposure to the U.S. cannabis market via a 5.9% stake valued at $25.7 million in PharmaCann, a private multi-state operator (MSO). It also has the option to acquire a 10.5% stake in that business for a total consideration of around $110.4 million in the event of federal cannabis legalization in the U.S.
But, as the prospects of full legalization even occurring are in flux as of right now, the U.S. can’t be considered as an earnings driver just yet.
Efficiency and Profitability
Currently, Cronos isn’t operationally profitable, though it has made significant steps towards reducing its losses by implementing cost cuts. Management plans to slash between $5 million to $10 million in selling, general, and administrative (SG&A) and research and development (R&D) expenses this year.
Given its operating losses of $15.9 million in Q1, those savings could potentially bring the business within striking distance of operating profits by the start of 2025.
Financial Strength
Another point in Cronos’ favor is that its balance sheet looks rock solid, especially in comparison to its peers. It has zero in the way of long-term debt, and $855.1 million in cash, equivalents, and short-term investments.
Therefore, it has more than enough resources on hand to acquire promising companies in any of its target markets, and it can likely comfortably enter another market or two as well.
Risks and Valuation
Cronos’ multinational status exposes it to several risks, including dealing with different sets of regulations and laws, incurring higher legal costs, and potential regulatory changes in its markets. Despite these risks, its enterprise value-to-revenue (EV/R) multiple is surprisingly low, as is its price-to-book (P/B) ratio.
Such a low EV/R ratio would under normal conditions suggest a business with a tremendous debt load or ghastly growth prospects. Neither of those explanations fits the Cronos of today, indicating that this stock is significantly undervalued.
Way Forward
Starting a position in Cronos could be a smart move presently, with the understanding that investors will likely need to hold on to their shares for at least a few years to see worthwhile returns.
The company’s growth and profitability trajectories thus far, as well as its current growth and efficiency campaigns, point to the Cronos of tomorrow being one of the leading multinational operators.
Likewise, its undervalued shares provide investors with a margin of safety and an opportunity for a good return on the risk.
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