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Is Cronos Group Stock a Buy?

By David Jagielski - Apr 7, 2020 at 7:53AM

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The cannabis stock is down more than 70% in the past year -- and that's unfortunately not that bad for a pot stock.

Cronos Group (CRON 1.76%) is one of the safer investments in the cannabis industry, largely thanks to the backing of big investor Altria Group (MO 1.15%). The tobacco giant's deep pockets can help offer stability that other pot stocks lack, especially when generating positive cash flow is still a goal for many cannabis companies. But let's take a look at whether Cronos, on its own, is a good investment and if it can outperform its peers in 2020.

Recent earnings report shows growth, but with many issues

On March 30, Cronos released its year-end and fourth-quarter results for 2019. They showed year-over-year sales growth of 71%, largely thanks to sales in the U.S. that didn't exist a year ago. That was because on Sept. 5, the Canada-based cannabis company closed its acquisition of Redwood Holding Group, which gave Cronos control over Lord Jones, a U.S. brand of hemp-derived cannabidiol (CBD) products.

Offering hemp-derived CBD products is the only completely legal way for Cronos to enter the U.S. cannabis market, as marijuana remains illegal at the federal level. It's an important piece of the company's growth strategy for the U.S. market, and the new segment contributed $2.7 million in revenue in Q4. That was 37% of the total $7.3 million that Cronos reported in consolidated net revenue. A strong footprint in the U.S. gives Cronos less dependence on Canada and international markets, where it currently generates the bulk of its revenue.   

Cannabis leaf over top of a map of Canada.

Image source: Getty Images.

But despite the increase, revenue still fell well short of the $11.6 million that analysts were expecting Cronos to report in Q4. The company was able to post a profit of $61.6 million for the quarter, but that was due to a non-cash gain of $118.8 million related to Altria's investment in the company. Overall, it wasn't a terribly inspiring quarter for investors, given that the company also wrote down $22.1 million worth of inventory. The one positive is that its cash on hand remains strong, with $1.2 billion in cash and cash equivalents as of Dec. 31.

Should investors be wary of Cronos Group?

In March, MarketWatch reported that the U.S. Securities and Exchange Commission (SEC) had made an inquiry into Cronos Group and was looking for information related to the company's revenue recognition. Cronos then restated its financials for the first three quarters of fiscal 2019; after eliminating certain transactions, the company wiped off a combined 7.6 million Canadian dollars from its top line for two of the quarters.

That was a significant piece of Cronos's total reported combined CA$19.2 million in net revenue for those periods -- to be specific, the adjustments effectively wiped out 40% of that.  Significant corrections like this can undermine investor trust in a company. And although Cronos has cleaned up its books now, it can be hard to regain trust after such material mistakes in the financials.

Despite its stability, investors should avoid Cronos

Cronos is likely to survive the coronavirus pandemic thanks to its large stash of cash. But that's not a reason to invest in the cannabis company. The pot stock is down 68% over the past 12 months, and that's better than the Horizons Marijuana Life Sciences ETF (HMLSF -0.83%), which has cratered by 73% during the same period.

Unfortunately, the SEC inquiry and the adjustment to revenue don't just paint the company in a poor light in terms of reliability and trust, they've also hit its market share. Just $23.8 million in net revenue for all of 2019 is nowhere near the CA$123.8 million in revenue (about $87.6 million U.S.) that Canopy Growth (CGC 1.83%) recorded in just its most recent quarterly report. And at a market cap of about $5 billion, Canopy Growth is valued only 2.5 times higher than Cronos Group's $2 billion. While that may be enough of a gap to compensate for the lower revenue, it's not enough to take into account the risk given the lack of trust investors may have with Cronos today.

Cronos may have ample cash on hand, but that's about the only positive for investors to take away. Investors will want to steer clear of this stock even at a 52-week low, because it may be more of a headache than it's worth.

David Jagielski 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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Stocks Mentioned

Cronos Group Stock Quote
Cronos Group
CRON
$3.46 (1.76%) $0.06
Altria Group, Inc. Stock Quote
Altria Group, Inc.
MO
$45.80 (1.15%) $0.52
Canopy Growth Stock Quote
Canopy Growth
CGC
$3.89 (1.83%) $0.07
Horizons Marijuana Life Sciences Index ETF Stock Quote
Horizons Marijuana Life Sciences Index ETF
HMLSF
$5.95 (-0.83%) $0.05

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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