By now, it’s become no secret that legal marijuana offers a potentially once-in-a-generation growth opportunity for investors. After global cannabis sales nearly hit $11 billion in 2018, according to the newest “State of the Legal Cannabis Markets” report from Arcview Market Research and BDS Analytics, they’re expected to soar to north of $40 billion by 2024, representing a compound annual growth rate of almost 25%.
If these various growth forecasts prove accurate and we do see relatively steady double-digit growth rates worldwide in the pot industry over the next 5 to 10 years, there’s little doubt that a number of marijuana stocks will come out as winners…
Cronos Group has left other pot stocks in the dust
Early investors in the marijuana industry have placed their bets and anointed Cronos Group(NASDAQ:CRON) as one of the must-own stocks of the industry. Since the beginning of 2016, Cronos has been a top performer, with gains totaling roughly 6,600% for those who’ve been willing to brave the wild vacillations that come with owning pot stocks.
Cronos Group really flew to the top of the pack after announcing in early December that Altriawould be taking a 45% nondiluted equity stake in the company. In return, Cronos received $1.8 billion in cash upon closing of the investment in mid-March. The belief here is that Altria will work with Cronos to create unique vape products throughout North America. And as for Cronos, there’s the reality that it can use its newfound fortune to make complementary acquisitions, boost capacity, broaden its product portfolio, and build up its existing brands. Prior to this deal announcement, Cronos had less than $25 million in cash on its books.
This is also a company with a large focus on the high-margin cannabinoid derivatives market. By derivatives I mean products that aren’t dried cannabis flower, such as oils. Cronos struck a deal worth up to $100 million with Ginkgo Bioworks last September that’ll allow it access to Ginkgo’s proprietary microorganism platform. In return, Cronos Group will utilize yeast strains capable of producing eight targeted cannabinoids, some of which are rare, at commercial scale. This focus on derivatives has been one of the primary selling points of Cronos Group’s stock.
Three reasons to keep your distance from Cronos Group
But as I’ve suggested numerous times before, this is a stock that has a lot to prove to Wall Street and investors. Here are three good reasons, even with a focus on high-margin cannabis derivatives, you should hold off on investing in Cronos Group.
1. Cronos Group’s valuation implies a flawless derivatives launch, which is unlikely
To begin with, the company’s market cap of $5.5 billion appears extremely lofty and assumes that the upcoming launch of derivatives in Canada will go off without a hitch. For those unaware, Health Canada has announced its intention to legalize a plethora of new cannabis consumption options by no later than mid-October. This launch of high-margin products is generating as much buzz within the investment community as the initial launch of recreational marijuana did in Canada on Oct. 17, 2018.
But here’s the problem: It’s unclear if the supply chain issues that have caused major marijuana shortages in Canada will be resolved by the time mid-October rolls around. A massive backlog of cultivation applications with Health Canada, along with shortages of compliant packaging, have ensured that it’ll take many more months, if not years, before marijuana supply can satisfy domestic demand.
Health Canada has announced changes to its cultivation license application procedure that should help expedite reviews. Going forward, only growers with completed cultivation facilities will be allowed to submit licensing applications. Nevertheless, it’s unlikely that Canada will be able to work through such rampant supply issues (for dried cannabis or derivatives) in such short order. That bodes poorly for Cronos Group’s chances of a flawless derivatives launch…
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