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Why Cronos Group Stock Sank Today

By Keith Speights – May 9, 2019 at 4:30PM

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Investors didn't like what they saw with the Canadian marijuana producer's Q1 update.

What happened

Shares of Cronos Group (CRON 0.17%) sank nearly 9% on Thursday after the Canadian marijuana producer reported its first-quarter financial results. Shares fell as much as 10.1% during intraday trading.

Cronos posted a surprise profit of nearly $428 million. However, the company's positive earnings stemmed from a gain related to the revaluation of warrants owned by tobacco giant Altria.

So what

Cronos Group's first-quarter results really weren't that bad. The company reported year-over-year revenue growth of 120%, driven in large part by increased sales of CBD oils. And while one analyst projects that industry leader Canopy Growth's sales for the latest quarter will decline from the previous quarter, Cronos' revenue jumped 15% sequentially.

Marijuana buds and cannabis oil bottle on top of a red Canadian maple leaf cutout.

Image source: Getty Images.

However, Cronos' sales growth remains limited by its production capacity. The new greenhouse being built by the company's Cronos GrowCo joint venture should address this limitation, but the facility won't be operational until next year.

The more important thing to remember is that it's still really early in the game for the global cannabis industry. Cronos Group's Q1 results simply don't matter very much in the grand scheme of things.

Probably the most critical number in the company's Q1 update was its cash position. Thanks to its major investment from Altria that closed in March, Cronos had cash and cash equivalents totaling more than 2.4 billion in Canadian dollars at the end of the first quarter. This cash stockpile will be much more significant for Cronos' future than its top or bottom line in Q1.

Now what

Investors should watch closely to see what steps Cronos Group will take to expand, now that it's flush with cash. The company announced earlier this week that it has opened a cannabinoid device research-and-development facility in Israel that will support Cronos' efforts to develop next-generation vaporizer products designed for cannabinoids.

Expect more investments in global expansion in the coming months. However, Cronos CEO Mike Gorenstein stated in the company's Q4 conference call that Cronos will focus on areas with "long-term sustainable value like developing and marketing innovative-branded products." This strategy will likely cause Cronos to be very selective as to where it invests its cash.

Keith Speights has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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