What happened
Shares of global cannabis company Cronos Group (CRON 3.60%) rocketed higher on Tuesday after the company reported its earnings for the first three months of 2022. The company missed Wall Street's earnings per share (EPS) estimates, but investors were happy with its solid growth numbers. As of 2:44 p.m. ET, the stock is up 13.5% on the day and was up as much as 19.1% at one point during trading hours.
So what
Before the market opened on May 10, Cronos Group released a financial update for the first quarter of 2022. Earnings per share, an important metric that financial analysts track, came in at negative $0.09. This is compared to analyst expectations for a loss of $0.08 in the quarter, meaning that Cronos Group missed expectations with its report.
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Typically, an earnings miss means investors will sell off the stock during trading hours, but that's not what occurred with Cronos Group today. Why? Because its top-line revenue growth looked quite impressive in Q1. Total revenue grew 99% year over year to $25 million, and Israeli revenue (one of its new markets) grew revenue by a scorching 263% year over year to $9.1 million. Both numbers likely impressed investors this morning.
On the profitability front, Cronos Group is still posting heavy losses, with a net loss of $32.6 million and $33.6 million in operating cash outflows in the quarter. With close to $1 billion in cash, this cash burn isn't a short-term concern but is something investors should be tracking. Luckily, it looks like Cronos Group is gaining some operating leverage as it scales its cannabis operations, with gross margin rising from negative 23% in Q1 last year to positive 28% this year. This indicates to me that the company should achieve positive net profits and cash flow if it continues to grow revenue at a rapid rate.
Now what
The cannabis market is tricky, with all sorts of laws around the world dictating special tax rules and what types of products businesses can sell. However, there is no denying that the industry is growing rapidly around the world, with some analysts expecting it to grow at a compound annual growth rate (CAGR) of 32% from now until 2028.
Cronos Group can take advantage of this tailwind and ride the cannabis wave to new heights in the next few years. Investors need to track the important profitability metrics, but at a market cap of $1.2 billion, Cronos Group could be a good investment for cannabis investors right now.
