Cronos Group (CRON 2.33%) didn't fire up investors the last time it reported quarterly results in May. But the cannabis producer announced its second-quarter results before the market opened on Thursday. This time around, there were several things for investors to like.
The company reported net revenue in Q2 of 10.2 million Canadian dollars, more than tripling its revenue in the prior-year period. Cronos even posted a profit of nearly CA$251 million. As you might expect with a profit that's higher than revenue, though, there's a catch. That big earnings figure stemmed from a CA$263.9 million gain on revaluation of warrants owned by tobacco giant Altria.
Perhaps the most interesting thing about Cronos Group's Q2 results were the implications for the rest of the cannabis industry. Here are three details in Cronos' latest quarterly update that impact all of the other Canadian cannabis stocks.
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1. The Canadian market is doing just fine
You might have heard that the Canadian adult-use recreational cannabis market isn't living up to all the hype. While it's true that there have been plenty of problems, including supply constraints and delays in retail stores opening in key provinces, Cronos Group's Q2 results show that the Canadian market is doing just fine.
As I mentioned earlier, Cronos' net revenue more than tripled from the prior-year period. But that's really not the big story. What's much more important is that the company's net revenue jumped 58% over the previous quarter. By comparison, Cronos reported quarter-over-quarter net revenue growth of 15% in Q1.
Momentum appears to be picking up for the Canadian adult-use market. Cronos Group's latest results aren't the only example of it. Last week, Aphria announced a lot of good news with its Q4 results, notably including that its revenue from the adult-use market jumped 158% quarter over quarter. This could hint that some positive quarterly updates are on the way for other cannabis producers.
2. CBD could stand for cash, bucks, and dollars
Cronos said that its Q2 net revenue growth stemmed primarily from higher sales of cannabidiol (CBD) oil. Twenty percent of the company's net product revenue in the second quarter came from CBD. And because there are no excise taxes on CBD in Canada, higher sales of CBD oils boost net revenue more than sales of cannabis flower do. In a real sense, CBD could stand for cash, bucks, and dollars -- not just for Cronos, but for any cannabis producer.
CBD is also the key, at least for now, to entering the huge U.S. market. Canopy Growth was the first Canadian producer to make its move, announcing in January that it planned to build a hemp CBD production facility in New York state.
Cronos remained silent on its U.S. strategy for a long time. Last week, however, the company jumped into the market headfirst with its announcement that it's acquiring Redwood, the maker of the Lord Jones hemp CBD consumer products.
3. Pay to play on the global stage
A few months ago, Cronos received CA$2.4 billion (around $1.8 billion) from Altria with the closing of a transaction first announced in December 2018. Cronos still had most of that money as of June 30, reporting cash, cash equivalents, and short-term investments totaling a little over CA$2.3 billion at the end of the second quarter. But expect Cronos' cash stockpile to be significantly lower in its next quarterly update.
Cronos' acquisition of Redwood will cost $300 million, of which $225 million will be paid in cash and another $75 million in stock. The company also announced in July that it's buying a fermentation and manufacturing facility from Apotex Fermentation using an undisclosed amount of cash. This facility will be used in connection with Cronos' partnership with Ginkgo Bioworks to develop high-purity cultured cannabinoids from engineered yeast strains at commercial scale.
The key takeaway for other Canadian cannabis producers is that they must pay to play on the global stage. Cronos and Canopy Growth have big partners that have forked over a lot of cash. As a result, they've been able to strike deals that should make them more competitive over the long run. Their rivals could be left in the dust if they don't forge partnerships with major companies outside of the cannabis industry.
