Cronos Q4 Results: Cannabis Stock With 51% Revenue Growth

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Chronos (NASDAQ: CRON), a Canadian operator, released its results for the fourth quarter of 2021 on Tuesday before the bell. This came just two weeks after the company released its third quarter results after a long delay. The company is finally in compliance after conducting a thorough audit review. The company is growing rapidly, but is bleeding money at an unparalleled rate. The company is doing some interesting things in its R&D department, but investors should wait for the results before giving it credit. I discuss the profit results and compare the action with the peer group.

CRON share price

CRON fell rapidly and its delay in releasing third quarter results certainly didn’t help. The stock is down 48% since the last time I hedged the stock.

CRON share price

Y-Charts

Unlike when I advised against buying stocks, stocks at current valuations finally look buyable. Still, even here it’s unclear if now is a good time to buy, in light of more compelling alternatives.

What is Chronos?

CRON is a Canadian cannabis operator, although it tries hard to give the impression that it is in fact a global cannabis operator. For example, it splits revenue as coming from “US” and “Rest of the World”, even though the US is only 10% of total revenue and Rest of the World mostly means Canada.

Chronos Footprint

Presentation to Cronos investors

Altria (NYSE: MO) previously invested $1.8 billion for a 45% stake in 2019, a partnership MO likely now regrets.

Chronos and Altria

Presentation to Cronos investors

This does not mean that CRON is a bad business. I make this assessment solely on the basis of the 80% decline in stock prices since then.

CRON is best known for its R&D ambitions. CRON has partnered with Ginkgo Bioworks (NYSE: DNA), a synthetic biology company, to produce cannabinoids in a more sustainable way. In short, DNA reprograms yeast cells to produce expensive/rare compounds – in this case, DNA helps CRON produce CBG, a highly sought-after cannabinoid compound.

Ginkgo Bioworks and Cronos

Presentation to Cronos investors

CRON has already started selling synthetically produced CBG through its Spinach brand.

Crono Brands

Presentation to Cronos investors

During the third quarter conference call, management noted:

“The success we are seeing is proven by the depth of the outlets. Our SOURZ by Spinach edibles achieved double-digit market share in the gummies category in Canada within six months of launch. And our breeding and genetics program has produced some of the best selling high THC flower SKUs on the market in Canada.

CRON is also known for its 10.5% investment in US multistate operator PharmaCann. PharmaCann has an attractive limited license footprint and would be a highly coveted title if it went public today.

Cronos investment in Pharmacann

Presentation to Cronos investors

Benefits of Cronos

After a long delay, CRON finally released its third quarter results at the end of February and is now up to date with the release of fourth quarter results. CRON attributed the delay to an audit of the company’s valuation of goodwill and indefinite-lived intangible assets. Following the completion of the valuation, CRON recorded an impairment charge of $236.1 million. The fourth quarter results are presented below:

  • Net revenue increased 51% to $25.8 million.

  • Gross profit was $1.9 million. This was surprising as gross margins were negative for many quarters.

  • Adjusted EBITDA was negative $27.4 million – a loss greater than total revenue.

  • Cash and short-term investments amounted to just over $1 billion. These do not include the $110 million investment in US MSO PharmaCann. This is significant, as the current market capitalization is around $1.7 billion.

These are not solid results, but they are not very different from previous results. Management has declared its intention to reduce costs in the future, but it remains to be seen how quickly it can do so. Some analysts even wondered if CRON was looking to outsource production, which is not an inspiring sign.

Valuation of CRON shares

CRON trades at a significant premium to its Canadian peers based on revenue.

Cronos Group Canadian Competitions

Cannabis Growth Portfolio

CRON burns far more cash than its peers, and notably it generates among the lowest gross margins – only Canopy Growth (CGC) can compare to the weakness.

Cronos and the Gross Margins of Canadian Cannabis Companies

Cannabis Growth Portfolio

Perhaps we can assume that margins might stabilize for all of these companies as the legal market takes share from the illicit market. In this case, CRON’s premium might be justified by its much faster growth rates. Am I interested in buying CRON today? If US Cannabis Stocks Didn’t Exist My Cannabis Portfolio Could Be CRON and Village Farms (NASDAQ: VFF). But with MSOs trading so cheap and with such strong fundamentals, I wouldn’t recommend buying Canadian names, not even for diworsification.