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Earlier this month, broker-dealers provided mixed signals on Cronos Group Inc. (Nasdaq: CRON) (TSX: CRON) following a lackluster first quarter earnings report. While one broker-dealer raised its price target on the Canadian Licensed Producer (LP), another firm lowered its price target and we find the disconnect to be a sign of the times in the cannabis industry.
There are a handful of companies that are executing on a strategy to become a leading global cannabis operator and competition is becoming more fierce on a year-over-year basis. Although Cronos received a more than C$2 billion investment from Altria (MO) in 2019, the story has been slow to advance and we believe the market has punished the stock for this.
During the first quarter, Cronos recorded a $37.1 million adjusted EBITDA loss on $12.6 million of revenue. When compared to the same period last year, revenue increased by more than $4 million and the primary drivers for this was the Canadian recreational market, the Israeli medical cannabis market, and the US hemp-derived CBD market.
When compared to the same period last year, Cronos recorded a slightly larger adjusted EBITDA loss. The increase was primarily driven by higher costs due to the focus on brand development in the US and on developing cannabinoid intellectual property (IP). Gross profit declined on year-over-year basis and this was driven by an higher net revenues and lower inventory write-downs.
A Company with Attractive Avenues for Growth
An attractive aspect of the Cronos story is its joint venture with Ginkgo Bioworks to produce cannabinoids using biosynthesis. The partnership will play an important role in how Cronos transforms industries through cannabinoid innovation and we will monitor how the relationship advances in the coming quarters.
After the quarter ended, Cronos was granted a Health Canada processing license for the commercial production and sale of cannabinoids using biosynthesis. With the license and relationship with Ginkgo, the management team expects to bring innovative products to market and we are favorable on the potential revenue that can be generated from this.
In regards to strategy international cannabis markets, we are favorable on the leverage that Cronos has to Israel and expect this market to play an important role in long-term growth. During the quarter, the Canadian LP expanded the Peace Naturals™ brand into the pre-roll category in Israel and we are favorable on the amount of value that can be created in this market. The launch follows the successful launch of dried flower and oils in Israel’s medical cannabis market in 2020 and we will monitor how the new product performs.
Focused on Creating New Revenue Streams
In the coming weeks, Cronos intends to launch a line of recreational cannabis edibles in Canada. The company’s edible product line is expected to be differentiated from what is currently available on the market. The new product category is expected to serve as a platform for future innovation and should provide Cronos Group with an attractive revenue stream.
From the development for cannabis 2.0 products in Canada to the creation of new products for certain international markets, we believe that Cronos Group has significant potential catalysts for growth. We are monitoring how the story evolves from here and will be keeping an eye on how the management team executes on previously announced growth initiatives.
Going forward, we will monitor how broker-dealers change ratings and price targets on Cronos Group. If you are interested in learning more about the Canadian LP, please send an email to support@technical420.com with the subject “Cronos Group” to be added to our distribution list.
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