While the COVID-19 pandemic caused havoc in many sectors, the marijuana sector has been lucky -- up until now, at least. The chaos and anxiety caused by the pandemic made many people turn toward marijuana for some kind of relief, which led to higher sales. Most cannabis companies performed exceptionally well in their recent quarters.
I have always favored Canadian pot company Cronos Group (CRON 1.43%) as a better cannabis pick for 2020. And while U.S. marijuana companies' performance has been outstanding amid the pandemic -- some have even done better than their Canadian counterparts -- Colorado-based Charlotte's Web Holdings (OTC: CWBH.F) is not one of them. Let me tell you why.
The case for Charlotte's Web
Charlotte's Web invited a lot of attention after it announced the acquisition of Abacus Health Products in March. Abacus combines active pharmaceutical ingredients with hemp extracts to manufacture over-the-counter topical products. The two companies combined are poised to capture the hemp-based U.S. cannabidiol (CBD) market, which has vast potential.
On completion of the acquisition last month, Charlotte's Web's boasted of "21,000 unique retail doors." Company CEO Deanie Elsner noted that "the addition of Abacus Health cements a market-leading position in both topical and ingestible products in the CBD category, representing approximately 33% market share of the U.S. CBD food/drug/mass retail channel."
The acquisition could prove beneficial for Charlotte's Web, which has seen tepid growth despite its large market presence. As stated in its first-quarter results, its products were seen in 11,000 retail locations, yet it saw a revenue decline to $21.5 million from $21.7 million in the year-ago period. Charlotte's Web attributed the decline to the lower business-to-business (B2B) sales.
Additionally, it saw a rise of 76.5% in operating expenses to $23.3 million, which is why it reported an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss of 5.7 million in the quarter, from a profit of $4.9 million in Q1 2019. Management is predicting revenue growth of 10% to 20% and positive adjusted EBITDA by the end of the year. I would wait for Charlotte's Web's third-quarter results to get a better picture of where it stands.
The case for Cronos
Cronos has been smart in utilizing its cash, mostly on enhancing its "cannabis 2.0" derivative products (edibles, vapes, beverages, and concentrates) and on research and development, rather than going on an acquisition spree like Aurora Cannabis (ACB 4.41%) did last year. This is probably the reason it has a strong balance sheet, despite reporting operating losses of 45.1 million Canadian dollars in its first quarter.
At the end of the first quarter, Cronos boasted CA$1.3 billion in cash and short-term investments. Having a strong balance sheet will not only help Cronos survive this crisis, but it will give the company a chance to focus on expansion later when things get back to normal. As more U.S. states legalize cannabis, Cronos will be able to make a mark in the U.S. market with its innovative products. Also, the new store roll-outs in Ontario this year will help drive legal sales.
Its first-quarter revenue showed 180% year-over-year growth to CA$8.4 million, with revenue from the U.S. market making up 26% of the quarterly total. Several U.S. states allow legal cannabis now, so imagine the revenue boost after federal legalization, especially given Cronos' strong partnership with tobacco giant Altria (MO -0.06%).
Cronos not only has a good position in the Canadian and U.S. markets, but it's now trying to capture the Israeli medical cannabis market with its innovative products. Though Israel is a smaller market than the U.S. or Canada, it has strong border restrictions that help to ward off competition from the illicit market, giving a boost to legal cannabis sales. We will know more about the growth strategies for 2020 when Cronos reports its second-quarter results next month.
All praise for Cronos
Charlotte's Web stated in its first-quarter results that it wasn't very affected by COVID-19. However, that was during the early stages of the pandemic. We will know more in its second-quarter results. The Abacus acquisition does help the company with a broader product portfolio and more retail locations, but the full extent of the acquisition will take a while to help both top-line and bottom-line performance. I would suggest waiting for Charlotte's Web's second-quarter results before making any investment decisions.
For now, Cronos is in a safer position amid the COVID-19 uncertainty. So far in July, shares of Cronos have gained 10.9%, while Charlotte's Web stock is down 3%. Meanwhile, the market as tracked by the SPDR S&P 500 ETF is up by 2.9%.
Indeed, cannabis sales are on the rise in the pandemic, but it is difficult to say whether the surge will continue. In times like these, it is better to have a strong balance sheet to deal with any uncertainty. In my opinion, Cronos is in a better position than most popular pot stocks.