In case you haven’t noticed, marijuana stocks are going bonkers, once again. After logging an abysmal fourth quarter, pot stocks have been blazing hot since 2019 began. Through Monday’s close (April 29), the first-ever cannabis exchange-traded fund, the Horizons Marijuana Life Sciences ETF, had tripled the return of the broad-based S&P 500 (52.8% vs. 17.4%), which is having its own year to remember.
As of this past weekend…
14 marijuana stocks had vaulted themselves into billion-dollar market caps, with OrganiGram Holdings, which was $3 million shy as of this past weekend, handily surpassing the $1 billion mark on Monday to become No. 15. The marijuana industry is now big business, and both Wall Street and investors have recognized it.
However, just because the cannabis industry has pie-in-the-sky revenue and profit potential, it doesn’t make all of these billion-dollar pot stocks default winners. In fact, 3 out of 4 of the largest marijuana stocks by market cap arguably have the most to prove to Wall Street.
Perhaps no company causes me to scratch my head in disbelief more than Cronos Group(NASDAQ:CRON), the third-largest pot stock by market cap, at $5.7 billion.
On one hand, Cronos Group secured $1.8 billion in much-needed capital when tobacco giant Altria agreed to invest in the company this past December. The equity stake, which closed in March, gave Altria a 45% non-diluted equity stake in the company, with the option to exercise warrants that it also received to up its stake to 55% at some point in the future. This investment provided Cronos with a healthy downside buffer, as well as significantly bolstered a cash position that stood at less than $25 million at the end of its fourth-quarter report.
Cronos also landed what should be a lucrative deal with Ginkgo Bioworks in September. For the cool sum of $100 million, Cronos will gain access to Ginkgo’s microorganism platform to develop yeast strains capable of producing targeted cannabinoids at commercial scale. Since cannabis derivatives are a much higher-margin product than traditional dried cannabis, this should, presumably, help Cronos in the profit department.
But the big issue with Cronos Group is that if you strip away its cash value, it has all the hallmarks of a middling to below-average producer. If blood were squeezed out of the turnip, so to speak, it might hit 120,000 kilos of peak production, which may only be good enough for a fringe top-10 spot in Canada in terms of peak yield.
Another concern is that the company has done very little in terms of expanding to foreign markets. Aside from a modest production presence in Australia and Israel and distribution deals in Germany and Poland, Cronos notably lags its billion-dollar peers in overseas appeal. Without ample international sales channels, Cronos runs the risk of being steamrolled by dried cannabis oversupply and commoditization within the next two to four years.
And don’t even get me started on profitability after the company delivered a measly $4.2 million in fourth-quarter sales (the first post-recreational weed legalization quarter in Canada). With its ballooned share count following the Altria equity deal, Cronos will be lucky to get its forward price-to-earnings ratio down below 100 before 2022. Suffice it to say, it has a lot to prove to Wall Street and investors.
The second-largest marijuana stock in the world by market cap, Aurora Cannabis (NYSE:ACB), also needs to do quite a bit to live up to the ridiculous amount of hype currently surrounding it.
A favorite among millennial investors, Aurora Cannabis has built itself quite the marijuana empire in the early going. It’s currently expected to lead all growers in peak annual output, and I see close to 780,000 kilos by 2022. Aurora also has a bigger global presence than any other marijuana stock, with representation (either production or distribution) in 24 countries, including Canada. Just as Cronos could struggle to offload its production within a few years, Aurora should thrive as a result of its efforts to expand overseas.
Yet plenty of questions remain. Perhaps chief among them is…
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