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Sunday, December 4, 2022

Cronos Capitalizing on Growing Cannabis Market

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These are interesting times for the cannabis sector, given the possibility of marijuana’s federal-level legalization in the United States. The cannabis market also seems to be gradually gaining traction in the eurozone, particularly in countries like Germany, where medicinal cannabis is making inroads.

Therefore, it makes sense to remain invested in few cannabis stocks. Cronos Group (CRON) is one attractive name in the sector. CRON stock has been trading largely sideways in the last six months. Given the positive industry outlook and the company’s promising business developments, it seems likely that the stock is positioned for a breakout. (See Cronos stock charts on TipRanks)

In terms of industry size, it’s expected that the legal cannabis market will be worth $70.6 billion by FY2028. Over the next seven years, the industry is likely to grow at a CAGR of 26.7%. Even if Cronos only matches the industry growth rate during this period and does not grow any faster, it’s an attractive investment story.

Increasing Presence In The United States

In a recent development, Cronos announced a strategic investment in PharmaCann, which has presence in six states in the U.S. PharmaCann is a vertically-integrated cannabis company with interest in the medicinal and recreational cannabis segment.

It seems that the cannabis industry is in a consolidation mode and Cronos has the financial flexibility to acquire and expand. A key reason is that Altria (MO) has a 45% stake in Cronos Group. Altria has robust financial flexibility, which can possibly allow Cronos to grow aggressively once the industry clears regulatory headwinds.

Cronos already has a presence in the U.S., with the company selling hemp-derived CBD-infused topicals and ingestibles. It’s expected that the U.S. CBD market will be worth $26.4 billion by FY2025. Companies like Cronos, Aurora Cannabis (ACB) and Canopy Growth (CGC) are best positioned to benefit from growth.

Focus on Medicinal Cannabis

In the next few years, the medicinal cannabis segment is likely to see robust growth. Estimates suggest that the market will grow at a CAGR of 25.16% through FY2028.

However, one of the headwinds to growth is a lack of evidence-backed medicines. In March 2021, the University of Bath’s Centre for Pain Research found a lack of evidence to endorse clinical use of medical cannabis for pain.

Cronos seems to be addressing this challenge. The company is already in a pre-clinical partnership for cannabis-based skin treatment with The Technion – Israel Institute of Technology. The evidence-backed research will initially focus on acne, psoriasis and wound healing.

It is worth noting that cannabis use in Israel is among the highest in the world. Cronos Israel has been focusing on research and development on medical cannabis. A breakthrough on this front can open up a big market in the eurozone.

Of course, clinical trials would imply that the impact of medicinal cannabis segment on growth will be seen only in the coming few years. However, Cronos seems to be moving in the right direction.

Review of Financials

For Q1 2021, Cronos reported revenue of $12.6 million, which was higher by 50% on a year-on-year basis. For the same period, the company’s adjusted EBITDA loss was $37 million.

Cash burn does not seem to be a big concern here, as long as revenue growth is robust. There are two reasons for this view. First and foremost, the company has cash and equivalents of $1.0 billion, which provide ample financial headroom.

Furthermore, the reason for EBITDA level loss is Cronos’ higher investment in research and development, which should be a positive for the company in the long-term. Additionally, the company has been investing in marketing efforts, which should also pay off in the long-term.

If these investments translate into a broader product portfolio and wider market visibility, Cronos can improve margins significantly in the next few years.

Wall Street’s Take

According to TipRanks’ analyst consensus rating, CRON stock comes in as a Hold with 2 Buy, 1 Hold and 2 Sell ratings assigned in the last three months.

As for price targets, the average Cronos price target is $7.66 per share, implying around 8.26% downside potential from current levels.

Concluding Views

If strong revenue growth sustains for Cronos, the stock will seem attractive. For now, the company’s focus is on increasing market share and developing new products. Therefore, cash burn is likely to continue, as it has for most cannabis companies.

At the same time, with strong presence in Canada, U.S. and the European Union, the company’s outlook is positive for the long-term. Furthermore, the financial backing of Altria is likely to be a game-changer once cannabis is legalized in the U.S. on a federal level.

Disclosure: On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.

The post Cronos Capitalizing on Growing Cannabis Market appeared first on TipRanks Financial Blog.

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