Cronos (CRON) shareholders enjoyed a quick, one-day, near-11% surge in share price Wednesday, and they didn’t have earnings to thank for it this time. In fact, Cronos’s May 9 earnings announcement actually only led to a 9% gain in the stock.
Instead, they had Bank of America (BofA).
On Wednesday, BofA’s Christopher Carey published what he called a “double-upgrade” of Cronos shares, flipping all the way from “underperform” to “buy” in an instant, with a new target price of $20, which implies nearly 30% upside from current levels. (To watch Carey’s track record, click here)
The analyst explained its move by referencing “a group lunch hosted by CAGNY (Consumer Analyst Group of New York) on June 4th in NYC in which CEO Mike Gorenstein noted that Cronos will be ‘aggressive’ and ‘we are not talking that long of a way out’ regarding a US CBD launch.”
This promise from Cronos management, combined with a belief that Cronos’s alliance with tobacco giant Altria will give Cronos an advantage as the U.S. market opens up to marijuana, provide the primary foundations for Carey’s decision to entirely reverse his opinion of Cronos stock.
Cronos sells both dried marijuana flower and also cannabis oil, the latter of which is growing by leaps and bounds — enough so that CBD “oil” sales that accounted for 9% of Cronos’s sales a year ago had grown into 23% of the business by Q1 2019. And yes, Carey believes that CBD is “big” for Cronos. The analyst estimates that CBD oil sales of $2 billion annually, currently, will grow to $11.5 billion by 2032.
Specifically, the analyst cites Americans’ “high propensity [to spend a lot of money on] wellness products,” which CBD is marketing itself as being one of. If only 1% of Americans eventually spend at least $50 a month on CBD products for “wellness,” Carey believes U.S. CBD sales could eventually tip the scales at the aforementioned $11.5 billion figure.
So far, so good. But in the analyst’s view, it’s Cronos’s alliance with Altria — which owns about 45% of Cronos stock — that will be the real game-changer for the cannabis company.
Altria boasts a “presence” in 230,000 U.S. stores, says Carey, primarily convenience stores (which the analyst shorthands as “C-stores”). As marijuana is gradually legalized in the U.S., the analyst expects Cronos products to appear in most or all of these locations, piggybacking upon Altria’s distribution network. This would, after all, be to Altria’s benefit given its sizeable stake in Cronos’s success.
In the analyst’s view, Cronos is most likely to try to leverage Altria’s distribution channels to develop cannabis-infused beverages, both hot and cold, and also “vapes” — CBD oil that can be heated for inhalation in a vaporizer — and perhaps even to develop the vaporizer devices themselves. Indeed, in that regard, Cronos announced in its last earnings release the establishment of a “Cronos Device Labs” R&D center at which it plans “to develop next-generation vaporizer products that are designed specifically for cannabinoid applications.”
If all goes according to plan, Carey estimates that Cronos, which sold less than $12 million worth of product last year, could be doing as much as $246 million in annual sales (C$330 million) by 2021. Cronos would still only be barely profitable at that level, granted. But then again, weak-to-nil profits have never scared investors away from buying marijuana stocks before. Why should they start now?
To read more on the nitty gritty of what’s going on in the rising cannabis industry, click here.