Nanalyze

Cronos Group Stock – What You Need to Know

As retail investors, we don’t have the resources needed to thoroughly analyze every investment we make. Realize that there are professionals who dedicate their entire lives analyzing a particular niche of investments, and they largely get it wrong based on the fact that 80% of investment managers can’t outperform a market benchmark. Still, it pays to “follow the money” as they say. In the case of marijuana, large corporate investors have shown interest in the sector from the makers of Corona beer to even Warren Buffet’s darling, Coca-Cola. The latest news to hit the wire is that Altria (MO), the $100 billion owner of the Marlboro brand, has decided to throw their hat into the marijuana ring with a $1.8 billion investment that sent Cronos Group Stock (CRON) soaring to new heights. It’s not the first time we’ve heard of Cronos Group.

(All numbers in USD because most of our readers hail from ‘Murica.)

Making Sense of Cronos Group Stock

Click for company websiteThis past March, we profiled this holding company in an article on The First Cannabis Stock to Trade on the Nasdaq and questioned their rapidly rising valuation and market cap (at that time) of $1.5 billion. Fast forward to today and we see that Cronos Group has a market cap of $2.28 billion following an investment by a cigarette manufacturer that commands a 46% market share of cigarette sales in the United States. While the investment shows a huge vote of confidence, let’s not overlook the dilution effects of the investment as seen below:

Cronos Group Stock Before and After Altria Investment

Source: Cronos Group

Since most retail investors who dabble in the cannabis space don’t pay much attention to valuations, why bother bringing up dilution? Instead, let’s look at what exactly Altria acquired with their 45% stake in Cronos Group.

As with many larger marijuana stocks, Cronos Group is a convoluted holding company that vomits forth dozens of partnerships, MOUs, joint ventures, and the like. When capital is flowing like the salmon of Capistrano, companies tend to get into bed with each other rather quickly to make sure they’re getting a piece of everyone’s pie. That results in corporate structures that look like this:

The Cronos Group Corporate Structure

Source: Cronos Group

With a list of subsidiaries that looks like this:

Cronos Group Subsidiaries

Source: Cronos Group

As you can see, in order to fully understand this entity, we would need to deep-dive into all of these subsidiaries to understand what each does today and what future potential looks like. One would assume that a team of MBAs over at Altria did exactly that, and the findings resulted in them purchasing 45% of the whole thing. As retail investors, we hardly have the time to track each and every entity, so we like to focus on a single metric – the amount of weed being produced and sold. Taking a look at the latest quarterly filing, we see that Cronos Group sold 514 kilograms of “flower” and cannabis oil at an average price per gram of $5.49 USD:

Cronos Group Kilos Sold

Source: Cronos Group

“Kilos sold” is a very clean and clear metric to follow, and in this case, Cronos Group is selling about 2,000 kilos of product based on last quarters’ production numbers. (To put that into perspective, a large producer like Canopy Growth produced nearly 9,000 kilos in 2018.) This is a metric that should steadily grow over time as production capabilities come online. The potential production capacity the company has is outlined in their latest financials as seen below:

Cronos Group Planned Production

Source: Cronos Group

To put that 117,150-kilo-number in perspective, Canopy Growth, Aphria, and Aurora collectively produced and sold just under 20,000 kilos in 2018. It will take some time for Cronos Group to get there, but at a full capacity of 117,150 kilos, that would equate to around $643,153,500 in annual revenues – which of course is why Altria has decided to make an investment here. (Just to put things in perspective, this is small beans for Altria given their 2017 revenues almost cleared $20 billion.) With Altria’s investment, Cronos Group now has plenty of cash to execute on these growth plans, but they just need to make sure they can sell all that cannabis.

Cronos Group Supply Agreements

Cronos Group plans to sell 117,150 kilos, but they need to realize that every marijuana grower out there has the same master plan which involves million-square-foot warehouses and thousand-ton projections. What’s going to happen when the market gets flooded with marijuana? One way to combat this problem might be to enter into longer-term supply contracts.

Cronos recently entered into five-year exclusive distribution agreements with a Polish pharmaceutical company and a German pharmaceutical company, the latter which hopes to address a “shortage” of medical marijuana in Germany. Of course, we have no way of saying what quantities will be consumed through either distribution agreement. Then there was the news that Cronos “secured listings and signed binding master supply agreements” with Canadian provinces that encompass half of Canada’s population. One wonders how many other Canadian cannabis producers have done the same thing. Of course, we’re relying on the MBAs over at Altria who would have had to ensure that Cronos Group is able to sell all the cannabis they plan to produce, some of which may actually be produced using synthetic biology.

Cronos Group and Ginkgo Bioworks

Cronos Group and Ginkgo Bioworks, the organism company, announced a partnership to produce cultured cannabinoids. While most of us only think about cannabis having THC, these beautiful plants produce a large range of cannabinoid molecules with different properties, and ongoing research has demonstrated potential medicinal uses for these molecules. According to the press release announcing the partnership, “many pharmaceutically relevant cannabinoids are present only at very low quantities in the cannabis plant, making them economically impractical, difficult or impossible to extract at high purity and scale.” Ginkgo plans to engineer custom yeast strains capable of producing eight target cannabinoids, including rare cannabinoids, at a fraction of the cost of currently available methods.

Major Cannabinoids

Source: Cronos Group

This is another potential revenue stream for Cronos Group and ought to eventually be reflected as a separate line item on their revenue breakdown should they ever be able to monetize this.

Conclusion

The rise of marijuana as an investment theme means that all kinds of first-time investors are opening brokerage accounts for the very first time and plowing their money into “marijuana stocks,” valuations be damned. This irrational behavior results in extremely irrational valuations which translates into lots of volatility. Even the world’s biggest marijuana ETF has sent its investors on an emotional roller coaster over the past year:

As an entry-level investor, this is not the sort of environment you want to be “learning how to trade stocks” in. Before you consider investing in any marijuana stock, Cronos Group or otherwise, pick up a copy of Reminiscences of a Stock Operator and read some age-old lessons on how to handle your emotions as an investor. That’s because marijuana stocks will continue to be an emotional ride as more and more investors pile in. The addition of capital from institutional investors will make these holding companies increasingly difficult to understand, so monitor their progress using simple metrics like “kilos sold” and “price per kilo sold.”

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