Companies are all about making profits through the sale of goods and services. Even when the moral compass prevents some firms from selling certain products, the demand for such commodities has led to the expansion of those willing to meet the customer’s needs. Cronos Group is in the business of selling medical marijuana and also distributes the drug to recreational weed users in four Canadian provinces. Unfortunately, it is not the only one, and the competition has led to price wars which also affect the value of a company and the profit margins.
The stock of Cronos Group has not been doing well despite the legalization of marijuana in Canada hence it continues to lose money even though Altria’s investment provides some cushioning when things are looking like they will not get any better. For any investor, a return on investment is the only thing that drives him to spend money therefore when a particular stock is not doing well, investors are cautious not to lose money, and that is what is happening in Cronos Group. Since their stock has been slipping, as an investor, here are two reasons you might want to step back from this company.
Cronos was ranked among the top 2018 marijuana stocks in Canada, and maybe that is what led Altria, the manufacturer of Marlboro cigarette to decide to invest $1.8 billion in the company. With the investment, Altria gets a 45% stake with the option of increasing it to 55% if it fully exercises the warrants it was also set to receive. By investing in Cronos, Altria stamps their belief in the marijuana industry and the move affords it access to the cannabis profits since the tobacco industry has been declining in the US. For Altria, this investment becomes a stepping stone seeing that it has lacked innovation in the past years.
However, the investment in Cronos may be overpriced, and it is bewildering how they enticed Altria into making such a deal. Even at optimal production, Cronos Group can only produce 110,000-120,000 kilograms of marijuana. On the other hand, OrganiGram Holdings can reach the same peak capacity in return for less than $600 million for 100% stake in the company. Moreover, Cronos Group produces far much less than its competitors, and even by 2020, it may only get to have the capacity of 70,000 kilograms, compared to Aurora Cannabis which reached such a capacity by November 2018. Further, it does not have as big recognition of its brand as other growers which attained the billion dollar market cap.
Little chance of making a profit
When Canada legalized marijuana for recreational purposes, investors and financial analysts changed how they analyzed the pot stocks. In the past, optimism played a role and a promise of profitability factored in the analysis but now how the companies operate is fundamental in making financial evaluations and conclusions on which investors can rely. Cronos Group has to spend money on building its brand while increasing its capacity if at all it wants to beat competitors. That will also mean expanding into the international market as well as doing extensive research and development and maybe even making acquisitions. Unfortunately, all these cost large sums of money which means that the sale proceeds will all go into such expenses leaving minimal profits if any.
Cronos Group may be unable to increase its production capacity in time to satisfy the demand making it lose out to competitors and thereby reducing the possibility of making substantial returns. Also, even though it hopes to expand to the global market, countries that have legalized medical marijuana may take time to have viable markets while those that it anticipates will legalize marijuana for recreational purposes may also take longer. In the US for instance, the possibility of legalizing marijuana is slim seeing the backlash that Canada has received and the Colorado data not making it any easier with the conclusion on how marijuana has affected the society.
Still even as it hopes to get other investors, its financial performance results may be a turn off for potential investors. For instance, it has a price to earnings ratio of 263 meaning an investor would have to pay $263 for every $1 of the company’s profits and of course no rational prospective investor would be interested in their stock with such a figure.