You wouldn't know that Cronos Group (CRON -0.82%) has been the biggest winner among marijuana stocks ever based on its recent stock performance. The Canadian cannabis producer's shares are down more than 40% in just the last three months.
Cronos Group's third-quarter results probably aren't going to help turn things around very much. The company provided its Q3 update before the market opened on Tuesday. Here are three things that you shouldn't overlook with Cronos' latest quarterly results.
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1. A revenue miss -- but still solid growth
The result that attracted the most attention was Cronos' revenue miss. Cronos reported Q3 net revenue of 12.7 million in Canadian dollars, below the consensus analysts' estimate of CA$14.14 million.
This revenue total represents a huge year-over-year jump of 238%. But the Canadian adult-use recreational market wasn't open in the prior-year period. The more important thing for Cronos is that its revenue increased by a solid 24% over the previous quarter.
The company actually sold 98% more kilograms of cannabis in Canada during the third quarter than it had in the second quarter of 2019. Its revenue didn't grow that fast, though, mainly because of a lower average selling price per gram. In addition, Cronos reported significantly lower cannabis oil sales compared to the previous quarter. The company also apparently didn't have any international medical cannabis revenue in Q3. However, revenue from Cronos Group's acquisition of hemp CBD company Redwood, which closed in September, helped offset these declines somewhat.
2. Its bottom line wasn't nearly as good as it looks at first glance
Cronos announced net income in the third quarter of nearly CA$788 million. That sounds great, right? Don't be too impressed.
The seemingly fantastic profit stemmed entirely from Cronos' gain of CA$835 million on the revaluation of derivative liabilities. Basically, Cronos Group's warrants and antidilution rights issued to Altria (MO 0.86%) with the tobacco giant's investment in the company aren't worth nearly as much due to Cronos stock's tanking in recent months. When your profit is solely a result of your stock's losing value, that's not a good thing.
Without the smoke and mirrors, Cronos Group's bottom line is heading in the wrong direction. The company reported an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss of CA$23.9 million in Q3 compared to an adjusted EBITDA loss of CA$17.8 million in the second quarter. The primary culprit is that Cronos' operating expenses, especially its general and administrative expenses, are skyrocketing.
3. Its big partnership is paying off
There was one key positive for Cronos in the third quarter that could be easy to overlook: Its big partnership with Altria is paying off. This is evident in a couple of ways.
First, Cronos still has a boatload of cash thanks to Altria's investment. Cronos ended the third quarter with CA$1.99 billion in cash, cash equivalents, and short-term investments. This cash stockpile puts the company in an enviable position compared to most of its peers.
Second, Cronos announced the launch of its new PEACE+ hemp CBD brand in the U.S. The company plans to sell the new line of products using Altria's sales and distribution network of U.S. convenience stores. As a result of its connection with Altria, Cronos should be able to place its hemp CBD products in around 1,000 retail stores in the U.S. There's no way the company would have been able to achieve this feat without a big partner.
Looking ahead
The big immediate opportunity for Canadian marijuana stocks is the cannabis derivative products market that officially launched on Oct. 17, 2019. These new products won't hit the market until mid-December. Cronos Group is transitioning some of its facilities to focus on producing products for this new market. While there won't be a financial impact in the next quarter from cannabis derivative products, look for a boost to Cronos Group's sales heading into next year.
Cronos could also generate significant growth in the U.S. The company's acquisition of Redwood added the premium Lord Jones line of products to its lineup. As mentioned earlier, Cronos is also launching its own new hemp CBD brand in the U.S. The U.S. market is likely to become much more important to Cronos Group's total revenue.
