Is Cronos a Buy After Reporting 51% Sales Growth in Q4?

Is Cronos a Buy After Reporting 51% Sales Growth in Q4?

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources , and more. Learn More The cannabis company’s business remains deep in the red despite its strong sales numbers.

Cronos Group ( CRON 2.20% ) hasn’t been a really serious contender in the marijuana market. On the revenue front, it doesn’t compare to the bigger vertically integrated cannabis businesses, and operationally, it struggles to turn a profit and continually burns through cash.

But it has been expanding its business and introducing new products, and based on the company’s most recent quarterly results, those moves may be starting to pay off. Image source: Getty Images. Sales are up, but not in the U.S.

One of the things I’ve always found bizarre about Cronos’ financials is management’s choice to lump Canada — its home base — into a “rest of the world” segment, but separate out the U.S. market, where it generates minimal revenue, into a segment of its own. While Cronos obviously hopes the U.S. will become a much bigger piece of its business down the road, in the meantime, this choice only serves to emphasize that its U.S. sales — mainly of hemp-derived cannabidiol products — aren’t doing all that well.

Data source: Company filings. Chart by author.

In the fourth quarter , Cronos’ consolidated net sales were up an impressive 51% from the prior-year period to $25.8 million. And it was the “rest of the world” segment that carried the business, with sales up 68%. In the U.S., revenue actually fell by 11%. Cronos credited the Q4 growth primarily to gains in the Canadian (recreational) and Israeli (medical) marijuana markets. Cronos’ margins remain abysmal, but there are reasons for optimism

Revenue growth on its own doesn’t tell investors if a business is on the right track. Gross profit and adjusted earnings before interest, taxes, depreciation, and amortization ( EBITDA ) can often offer hints as to whether the business is growing sales at a profitable rate or not. And for Cronos, that isn’t the case.

Data source: Company filings. Chart by author.

Without a stronger gross profit, the company’s hopes of reaching positive adjusted EBITDA remain faint. But there is one wildcard that could make that a reality: cultured cannabis.

In October, Cronos launched its first cultured cannabis product: the Chill Bliss gummy, under its Spinach Feelz brand. Lab-made products could help bring the company’s costs of production down significantly and improve its prospects for profitability. Plus, they would also help it bring more unusual products to market, ones that feature rare cannabinoids. While investors are likely well aware of cannabidiol (CBD) and tetrahydrocannabinol (THC), they may not have heard of cannabigerol (CBG). Cronos claims that its new gummy was the first of its kind sold in Canada to contain both THC and cultured CBG.

It’s far too early to tell just how successful these types of products will be. And although Cronos is generating more in revenue, the answer to the question of whether the business is more investable will come down to whether its margins are improving. Should you buy Cronos today?

There’s potential for Cronos stock to soar if its cultivated products prove to be the difference-makers that management expects them to be. But for now, this pot stock remains an ultra-risky buy. It’s down by 66% over the past year, an even deeper decline than the 58% drop in value for the industry benchmark Horizons Marijuana Life Sciences ETF .

And to make matters worse, Cronos still isn’t cheap compared to its peers as measured by price-to-sales ratio. Instead of trading at a discount, Cronos continues to trade high relative to most other marijuana businesses — and there simply isn’t a reason to pay a premium for it right now. Cronos still has a lot to prove, and until it shows much more improvement on its gross margins, this is a stock I’d stay far away from, as its share price is likely to continue falling in the weeks and months ahead. Should you invest $1,000 in Cronos Group right now?

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