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Why Cronos Group Shares Rose Despite Worse-Than-Expected Q1 Results

By Keith Speights - May 7, 2021 at 1:15PM

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Investors are focused on the future, not the past.

Cronos Group (CRON 0.66%) bolted out of the gate this year, with its shares quickly skyrocketing more than 120% by early February. Most of those gains have evaporated over the last three months, though. 

Investors hoping for a catalyst now have at least a small one. Cronos announced its first-quarter results before the market opened on Friday. The Canadian marijuana stock rose more than 4% in early trading. Here are the highlights from Cronos' first-quarter update.

Marijuana leaf over an American dollar bill.

Image source: Getty Images.

By the numbers

Cronos reported revenue in the first quarter of $12.6 million. This result reflected a 50% jump from the prior-year period's total of $8.4 million. But it came in well under the average analyst revenue estimate of $16.5 million.

The cannabis producer announced a first-quarter net loss of $161.6 million, or $0.44 per share, based on generally accepted accounting principles (GAAP). The average analysts' estimate was for a net loss of $0.08 per share. In the prior-year period, Cronos posted GAAP earnings of $75.7 million, or $0.20 per share. 

Cronos recorded an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss in the first quarter of $37.1 million. This result was in line with its adjusted EBITDA loss in the same quarter of 2020.

Behind the numbers

The company's strongest growth came from the sale of cannabis flower products, with revenue skyrocketing 244% year over year to $9.4 million. This big increase came from continued improvement in the Canadian adult-use market as well as sales in the Israeli medical cannabis market.

Cronos' U.S. segment revenue jumped 12% year over year to $2.4 million. The primary growth driver was the launch of new hemp-derived CBD products in the U.S. market.

The company faced some headwinds, though. CEO Kurt Schmidt said that Cronos' sales in Canada continued to be negatively affected by the pandemic. Cannabis extract sales also plunged 79% year over year to $703,000.

Cronos' cost of sales was higher in the quarter than its net revenue. As a result, even if the company didn't spend a dime on operating expenses, it would have still lost money. The biggest culprit behind the glaring net loss, though, was a loss on revaluation of derivative liabilities of $116.9 million. When Cronos' share price goes up (as it did in the first quarter), it records a loss on the revaluation of warrants held by its major shareholder, Altria.

Looking ahead

Why would Cronos' share price rise after missing analysts' estimates on both the top and bottom lines? Probably because investors are confident that the company's future performance will be better. Cronos provided some reasons for optimism in its first-quarter update.

For one thing, Cronos Fermentation received a Health Canada processing license in April to commercialize fermented cannabinoids. This was an important step in the company's partnership with Ginkgo to market high-quality cannabinoids produced via fermentation.

Cronos plans to launch new edibles in the Canadian adult-use market within the next few weeks. Also, concerns about the impact of COVID-19 could decline as more vaccines are available to Canadians.  

Looking outside of Canada, the company's Lord Jones brand recently launched a major marketing campaign that includes TV spots in certain U.S. markets. Lord Jones also introduced a new product, CBD Bump & Smooth Body Serum, that's already available on its website and will soon be featured on Sephora's website and retail stores.

The big wild card for Cronos, though, is the potential for major cannabis reform in the U.S. The company stands as one of several top Canadian cannabis producers that are poised to profit from U.S. marijuana legalization, or at least from changes to federal laws that recognize the rights of states to enforce their own cannabis laws. 

Keith Speights 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
$3.05 (0.66%) $0.02
Altria Group, Inc. Stock Quote
Altria Group, Inc.
MO
$45.13 (0.87%) $0.39

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