What happened
Shares of Cronos Group Inc. (CRON -0.82%) were up 11.6% as of 11:27 a.m. EDT on Wednesday after rising as much as 20.1% earlier in the day. Cronos Group's share price also jumped 14% on Tuesday. The gains for both days stemmed largely from Cronos Group's announcement on Tuesday of what the company described as "a landmark partnership" with Ginkgo Bioworks to produce cultured high-purity cannabinoids from engineered strains of yeast.
So what
There are several challenges with producing high-purity cannabinoids by growing cannabis plants and extracting the cannabinoids from the plants. It's a relatively expensive process. Scaling these operations to commercially viable levels is also difficult.
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Cronos thinks that its partnership with Ginkgo Bioworks will change these dynamics. Ginkgo's biosynthesis process holds the potential to reduce the cost of high-purity cannabinoid production and do so at a commercial scale.
The deal between the two companies gives Cronos Group exclusive rights to the technology. In exchange, Cronos will fund parts of the research and development and foundry expenses as well as issue up to 14.7 million shares of its stock to Ginkgo. The transaction is valued at close to $100 million if all milestones are met.
Ginkgo's process is similar to brewing beer in a microbrewery. Assuming it works successfully in producing high-purity cannabinoids, Cronos Group could be in a great position to further its own medical cannabis aspirations as well as supply cannabinoids to drugmakers.
Now what
While the deal with Ginkgo Bioworks is good news for Cronos Group, the big story for the company continues to be the opening of the recreational marijuana market in Canada in October and the expansion of the global medical cannabis market. There's also a possibility that Cronos could be picked by a major alcoholic beverage maker as its cannabis partner, with Diageo at the top of the list of prospective suitors.
All of these positives have propelled Cronos Group stock much higher so far in 2018. However, the stock has also been very volatile, especially after a noted short-seller published a critical online report about Cronos last week.
The company's past performance doesn't justify its market cap of more than $2 billion. A tremendous amount of growth is baked into the stock's price. Partnerships and other deals could cause Cronos stock to jump, but over the long run, the company will have to deliver on the sky-high growth expectations to keep its momentum going.
