Many marijuana stocks have skyrocketed over the past few years, but none of them has done so more than Cronos Group (CRON +3.08%). Not only did Cronos rank as the No. 2 top-performing Canadian marijuana stock of 2018, but it's also the best-performing marijuana stock of all time. Cronos Group has nearly doubled so far in 2019 -- and we're less than three months into the year.
With this impressive track record, it's not surprising that many investors are looking at possibly buying shares of Cronos Group. Before you take the leap, though, there are five things you should know about Cronos Group first.
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1. Its production capacity lags behind several peers
A marijuana producer can only sell what it can grow, or obtain from another marijuana producer. Capacity is king in a market where demand outstrips supply, as it does now. Cronos Group, though, lags behind several peers when it comes to production capacity.
While Cronos Group ranks fourth among Canadian licensed producers in terms of market cap, it's lower on the list when the companies are sorted by projected production capacity. Cronos currently can grow a little over 40,000 kilograms of cannabis on an annualized basis. The company is on track to have an annual production capacity of around 117,000 kilograms, not counting the to-be-determined capacity from its 50% stake in Colombia-based NatuEra.
Check out the latest earnings call transcript for Cronos Group.
2. There's good news and bad news for Cronos in Canada
Most of Cronos Group's current fortunes ride on the Canadian recreational marijuana market. The bad news is that the company's limited capacity means Cronos is likely to trail well behind its top rivals in market share, especially Canopy Growth and Aurora Cannabis. In addition, Cronos doesn't have supply agreements in place with as many provinces as these two competitors do.
The good news is that Cronos Group's revenue should soar anyway. While the company might not claim as many provincial supply agreements for recreational marijuana as its larger peers, it has a major deal with Cura Cannabis Solutions to supply a minimum of 20,000 kilograms annually over the next five years. Cronos also should be in great shape to reach consumers through its partnership with top U.S. cannabis retailer MedMen.
3. The company's international efforts are still in their early stages
Cronos Group's current market cap of around $3.7 billion probably can't be justified by the Canadian opportunity alone. The company needs strong international sales. However, investors should know that Cronos Group's international efforts are still in the very early stages.
In Cronos Group's third quarter, international sales represented less than 12% of total revenue. That percentage will probably be even lower when the company reports its Q4 results because of higher sales in the Canadian recreational market.
Cronos has a good start, though, in expanding internationally. It has distribution partnerships in Germany and in Poland. The company also has joint ventures in Australia, Israel, and Colombia. The biggest question market for Cronos on the international front is what steps the company might make to enter the U.S. hemp market.
4. It could have a transformative technology on its hands
One potentially overlooked component of Cronos Group's value proposition is that it could have a transformative technology on its hands. In September 2018, Cronos announced a partnership with Ginkgo Bioworks to produce cultured high-purity cannabinoids from genetically engineered strains of yeast. Cronos Group received exclusive rights to the technology as part of the deal.
Why could this be so important? Using the genetic-engineering approach could drastically lower the costs of producing cannabinoids such as cannabidiol (CBD). If Ginkgo Bioworks is successful, Cronos Group could be in the driver's seat in providing cannabinoids for use in products such as beverages, edibles, and cosmetics.
Granted, these efforts might not be able to scale up as hoped. It's also possible that other companies could succeed in producing cannabinoids from yeast. Still, Cronos Group's partnership with GinkGo gives investors a lottery ticket of sorts that just might pay off in a big way down the road.
5. A big partner puts Cronos in the top tier
Probably the single most important thing you should know about Cronos Group is that Altria (MO 0.40%) is investing $1.8 billion in Cronos for a 45% stake. The tobacco giant also will have warrants that allow it to gain another 10% stake in Cronos Group, giving it a majority interest.
This deal provides Cronos Group with a significant amount of cash to fund further expansions. It also gives Cronos a partner with a long and successful track record of building consumer brands in highly regulated markets across the world.
Most of Cronos Group's peers can't claim to have received an endorsement like Altria is making with its sizable investment. None of Cronos' rivals have as close of a relationship with a company as big as Altria is.
The bottom line is that Cronos Group's partnership with Altria puts in the top tier of marijuana stocks. The financial resources and marketing expertise that Altria brings should enable Cronos Group to effectively capitalize on the tremendous growth on the way for the global cannabis market.
