Based upon its performance and numbers, Cronos (CRON) is one of the most overvalued cannabis stocks in the sector. It gains a lot of positive outlook because of Altria’s (MO) investment in the company, and the potential benefits in that, but Cronos has yet to prove it can generate the type of products that play into the strengths of Altria.
But the performance of Cronos leaves a lot to be desired when considering it only produced 181 kilograms of finished dried cannabis and 200 kilograms of oil in the reporting period, totaling only $2 million in value.
The market is increasingly looking for Cronos to benefit from the growing CBD market, which if it can deliver desirable products, could possibly live up to past expectations.
It has recently experienced a number of downgrades on its weak performance.
The Altria factor
For the few cannabis companies that have received investments from large companies, the market has rewarded them with huge valuations; disproportionately in my view. After all, look what has happened to Canopy Growth lately even with the billions Constellation Brands has poured into it. Its disappointing results has taken down the bulk of the cannabis industry with it, because most in the market (not me) considered it the bellwhether of the industry. The point is capital alone can’t buy results.
As for Altria, its investment in Cronos prematurely rewarded it legitimacy in the eyes of the market. Altria has the ability to leverage products coming from Cronos, but those products have to be attractive and meet market demand.
It’s no secret Altria has about 230,000 physical outlets in the U.S. it can distribute products through, and if Cronos products land in some of its premium shelf space, it would be a potentially large growth catalyst for the company.
Another major benefit from the partnership is Altria’s marketing expertise which will allow it to further leverage products at a level Cronos couldn’t come close to matching on its own.
There is also the fact the types of supply chain issues in Canada have already been able to be solved by Altria with its own products. That should reduce most of the friction, which will probably result in smooth and relatively unhindered delivery.
The $2.4 billion investment in Cronos doesn’t hurt either, although as mentioned, the company hasn’t been able to turn things around with yet.
With all these positives, there is a huge cog in the wheel that could undermine the potential Cronos has with Altria.
CBD considered the future of Cronos
The CBD market is considered to be the major catalyst that will drive growth for Cronos going forward. The Brightfield Group projects CBD sales to soar to $22 billion by 2022. While that may be a little too optimistic, even if its fairly close to those numbers, and if Cronos wins significant market share, it will be a major growth engine for the company.
The huge challenge for Cronos at this time is its lack of ability to build out branded products that would benefit from the leverage and expertise Altria offers it.
For example, on the recreational pot side of the business it has developed two brands: “COVE” and “Spinach,” neither of which have impressed the market. Not only does that suggest it’s going to struggle to generate adult-usage revenue, but could struggle to build sustainable brands in the CBD market as well.
It doesn’t matter how many physical locations Altria has, or marketing expertise, if it doesn’t have quality products to work with. That’s the enormous challenge ahead for Cronos, which is expected to make its big push into CBD in 2020.
Conclusion
Investors need to look beyond the Altria connection Cronos has with the obvious potential benefits, and focus directly on the types of products the company develops.
Having accessibility to a huge distribution network that includes marketing expertise, doesn’t guarantee Cronos will have the types of products available that will meet market demand.
For that reason, I see the market making assumptions about Cronos that is has yet to prove.
If it in fact does manage to identify market demand and fill it, than yet, the potential for future growth is enormous. If not, Altria and its money won’t be able to turn it into a profitable player in the industry.
The problem for Cronos is that without Altria it’s not much more than a tiny company that would struggle to find long-term growth in any meaningful way. That points to weakness it must rapidly overcome in order to leverage the massive distribution network and supply chain Altria has ready for it to use.
To read more on the nitty gritty of what’s going on in the rising cannabis industry, click here.
Disclosure: No position.
