Cronos Group (CRON -0.99%) has been one of the safer pot stocks to invest in, if for no other reason than it is backed by tobacco giant Altria, which owns a 45% stake in the business. But beyond that, Cronos hasn't given investors much reason to buy in. With relatively low sales numbers and operating losses in each of the past four quarters, its financials aren't all that impressive.
But now that the company may have an exciting new line of products on the way, I think that picture could change. The company recently made an announcement that could be a game changer not just for Cronos, but for the entire industry.
Company to launch lab-grown products
According to Bloomberg, Cronos Executive Chairman Mike Gorenstein expects that his company will have lab-grown cannabis products available as early as this year. The products would be the first of their kind for the industry. And although it would be a different way of making cannabis, he says that the tetrahydrocannabinol (THC) or cannabidiol (CBD) would be the same as what producers are making today, stating that, "the cannabinoids are the same whether they're coming from the plant or from fermentation."
Lab-grown products have been on Cronos' radar for a while. In 2018, it acquired biotech company Ginkgo Bioworks for $122 million with the goal of creating cultured cannabinoids. And now, it appears that day is swiftly approaching.
Why this could make the stock a scorching hot buy
For Cronos, this is an exciting development -- if there is no difference to the consumer, these products could make the company a lot more competitive. The big advantage is that Cronos could make lab-grown products for pennies per gram. And keeping costs down is essential in order to compete with the black market.
Low-cost marijuana producer Aphria (APHA) is among the most successful companies in the Canadian pot industry, posting seven straight quarters of positive adjusted EBITDA. In its Jan. 14 earnings release, the company reported an "all-in" cost per gram of $1.30 Canadian dollars for the period ending Nov. 30, 2020. It was a 7.8% reduction in cost from the previous quarter.
With lab-grown products, the cost per gram could be as little as CA$0.10 per gram, according to an estimate from Raymond James. It's not clear how closely this would compare to Aphria's "all-in" costs, but even when compared to its cash cost of producing dried cannabis at CA$0.79 per gram, Cronos would still be much more efficient.
Many companies have been introducing value brands in order to compete with the black market and gain more market share. Aurora Cannabis launched the "Daily Special" last year, while Tilray, which is merging with Aphria, offers consumers "The Batch," which its Chief Marketing Officer Adine Fabiani-Carter called "a new no-frills cannabis brand focused on delivering quality cannabis flower and pre-rolls at competitive prices."
Gaining more market share is crucial for Cronos, as over the past three quarters its net sales have totaled just $29.7 million. Aphria made more in just its last quarter, with net revenue of CA$160.5 million ($125.2 million).
Should you invest in Cronos today?
In the past year, shares of Cronos are up 90% -- better than the Horizons Marijuana Life Sciences ETF's returns of 80% during that time. And while there is a lot of excitement surrounding the company right now, especially if its lab-grown products hit the markets this year, investors still need to be careful. Given its low market share, Cronos is still trading at a very high price-to-sales (P/S) multiple compared to the stocks mentioned above:
The good news is that the ratio can come down in a hurry if Cronos is able to build on its recent growth. In its most recent earnings release on Nov. 5, 2020, sales of $11.4 million for the period ending Sept. 30, 2020 were double what Cronos generated a year ago. But that still doesn't change the fact that the company still has a long way to go to catch up to its peers.
Cronos stock could soar if its lab-grown products hit the market this year and become a hit with consumers. But that's by no means a guarantee. With a high valuation and too many question marks surrounding its business, the stock is far from a sure thing right now. And that's why despite the potential, I'd hold off on investing in Cronos just yet. Until the new products are out and there's proof that demand is strong, this is still going to be one of the riskier pot stocks out there given its astronomical price tag.
This article represents the opinion of the writer(s), who may disagree with the "official" recommendation position of a Motley Fool premium advisory service. We're motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.