Shares of Cronos Group (NASDAQ:CRON) fell 10% on Tuesday after an analyst at Canaccord Genuity downgraded the marijuana stock from hold to sell based on the company's valuation.
On Monday before the bell, Cronos reported its fourth-quarter 2017 earnings, with sales up 274% year over year, but revenue started from a small base, so that only amounted to 1.6 million Canadian dollars.
For the entire year, sales were CA$4.1 million, but let's be generous and extrapolate out from the Q4 sales figure, giving Cronos an annual run rate of CA$6.4 million. (That's 1.6 million times 4 for those of you doing the math at home). Given that the company's market cap is about CA$1.4 billion, it's trading at a whopping 220 times sales.
Now sure, Cronos has a lot going for it, including international expansion into Israel thanks to a deal with Kibbutz Gan Shmuel, and a recent joint venture with MadMen Enterprises that will get its product into new retail stores in Canada. But it's going to require quite a lot of additional sales for Cronos to grow into its current valuation.
As with any high-growth industry, it's quite hard to value the marijuana business. Without a history of legal sales to provide guidance, it's anyone's guess as to how large the market can really get. Tuesday's pullback in Cronos Group's share price might end up being a buying opportunity, but it seems investors are likely in for a roller coaster ride -- perhaps higher, perhaps lower, likely both -- until our understanding of the legal marijuana market becomes clearer.