Even With $1.5 Billion in Cash, This Pot Stock Isn’t a Buy

Money isn’t everything when purchasing cannabis stocks.

Sean Williams

Over the past 13 months, the marijuana market has actually done a 180– and not the excellent kind. Following a first quarter in 2019 that saw more than a dozen pot stocks get at least 70%, the past 13 months have included across-the-board decreases for North American cannabis stocks of 50%to 95%.

To our north, Canadian licensed producers have actually been kept back by a wide variety of regulative problems. Health Canada was slow to approve cultivation and sales licenses and delayed the launch of high-margin derivatives till mid-December. Furthermore, Ontario’s previous lottery-based retail licensing system didn’t work, with just two dozen dispensaries opening in the first year of adult-use weed being legal.

On The Other Hand, in the U.S., high tax rates on legal marijuana have made it virtually difficult for merchants to take on the black market.

The cherry on top is that many North American pot stocks have actually likewise had difficulty accessing nondilutive types of funding, leaving some pot stocks rushing for cash. As cannabis investors have discovered, money isn’t everything when it comes to investing in marijuana stocks.

A handful of dried cannabis buds lying atop a messy pile of cash.

Image source: Getty Images.

Cash isn’t constantly king in the marijuana area

Take Cronos Group( NASDAQ: CRON) as a best example. Essentially, Cronos Group has $1.5 billion in net money and a market cap of $1.

Cronos entered into this money stockpile in March 2019, when tobacco giant Altria Group( NYSE: MO) closed on a $1.8 billion equity financial investment that offered it a 45%stake in the company. The expectation was that Cronos would have the ability to use this capital to make acquisitions, push into worldwide markets (including the United States), surpass its existing infrastructure, and support the launch of derivatives, which occurred in late 2019.

Plus, Altria has decades of experience in marketing smokable items to consumers. With a 45%equity stake in Cronos and a U.S. tobacco service that’s seen steadily decreasing cigarette shipments, it was expected that Altria would assist in the advancement and launch of cannabis-focused vape products in a legalized acquired market. Among the various alternative-consumption options, vapes have actually been pegged by Wall Street as the greatest growth chance.

With a brand-name collaboration and a considerable amount of money in tow, Cronos Group may appear like a no-brainer buy. However even with $1.5 billion in money, it remains a highly preventable pot stock

A bearded man in sunglasses exhaling vape smoke while outside.

Image source: Getty Images.

Cronos Group’s growth strategies have actually gone up in smoke

Thus far, Cronos Group has just put its cash to deal with one significant transaction. In 2015, it acquired Redwood Holdings for $300 million– $225 countless which was paid in money Redwood is the company behind the Lord Jones brand of CBD-based charm products.

Sadly, the cannabidiol (CBD) craze appears to have fizzled out as quickly as it entered into being, and the U.S. Fda (FDA) is partially to blame. The FDA has been extremely clear that it’s not going to permit CBD items into food or beverages for the time being and has actually raised security concerns about long-term CBD use. That’s put a real cap on the near-term capacity for the hemp industry and CBD. To put it simply, Cronos’ strategies to take the U.S. by storm have not worked out as planned.

Equally important, Cronos Group’s vape ambitions have been thwarted in a number of ways.

Another issue is the coronavirus illness 2019 (COVID-19) pandemic, which first manifested in China. During the months that parts of China had actually carried out mitigation measures created to ward off the spread of COVID-19, supply problems appeared for a variety of industries, including cannabis You see, nearly all vape pens are made in China, putting the North American vape industry at danger of a substantive item lack in the near term.

Also of concern is that Quebec and Newfoundland & Labrador have actually prohibited vape sales, pending additional research study. Alberta banned vape sales initially, however its ban only lasted for 2 months. The point here is that the Altria-Cronos tie-up hasn’t had a chance to shine due to a variety of issues.

An assortment of flowering cannabis plants growing in an indoor commercial farm.

Image source: Getty Images.

From a production perspective, Cronos gets lost in the crowd

Making matters worse for Cronos Group, it’s a business that predominantly ignored production escalation in 2018 and 2019 in favor of calculated moves into the derivatives market. With those acquired products not living up to expectations thus far, Cronos’ production abilities have been exposed as below average, a minimum of for its size.

What do I suggest by subpar? Cronos has one totally operational grow farm that produces a reasonable amount of marijuana on an annual basis. At its peak, Peace Naturals can 40,000 kilos a year. Cronos Group repurposed some of this center to handle processing and research study for higher-margin derivative products. By contrast, Aurora Marijuana, Canopy Growth, Aphria, and Tilray are all fully capable of maybe 100,000 kilos to 300,000 kilos in peak output annually. In truth, you can find publicly traded Canadian certified manufacturers at sub-$70 million market caps with more output capacity than Cronos Group. That’s what I indicate when I say subpar.

Suffice it to state that Cronos Group’s meager harvest hasn’t led to anything near running profitability. To be clear, Cronos Group has been profitable previously, but this includes a huge asterisk That’s because it’s relied on fair-value changes and revaluing its derivative liabilities (i.e., warrants held by Altria Group tied to its equity financial investment) to press into the green. Based upon no-nonsense accounting, Cronos isn’t anywhere near recurring success.

What’s more, Cronos announced a restatement of its 2019 financials in mid-March, removing roughly $7.6 million Canadian in sales from a currently anemic top-line figure.

Put clearly, Cronos Group’s money isn’t from another location adequate of a dangling carrot to make this stock a buy.

Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.”> Sean Williams has no position in any of the stocks pointed out. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy


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