CA - Cronos Group: Cannabis Bank

2023-05-10 07:00:00 ET

Summary

• Cronos Group reported another horrible quarter with cannabis sales slumping.
• The company is not much more than a glorified bank now raking in $10 million in quarterly interest income.
• CRON stock has a negative enterprise value, but investors won't touch Cronos with a large adjusted EBITDA loss and questionable growth forecasts.

Cronos Group ( CRON ) reported a prime part of the positive cash flow story is the growing interest income from the large cash balances. The cannabis business remains almost non-existent, highlighting the constant problem with the stock. My investment thesis remains Neutral on the stock due to the cash balance and the investments, but the company offers no reason to actually invest.

Headed In The Wrong Direction

Cronos has mostly failed to launch the cannabis business, yet revenues declined 20% YoY during Q1'23. The company doesn’t have much business to lose, yet the revenues dipped nearly $5 million over last Q1.

The company improved adjusted EBITDA due in large part to cutting operating expenses because gross margins were a paltry 12%. While multi-state operators (MSOs) are struggling to grow revenues, the larger set of MSOs already has massive margins and positive cash flows in a lot of cases.

Cronos guided to 2023 revenues of $100 to $110 million, which appears problematic in this environment. The cannabis company has no history of scaling revenues, especially in this difficult economy. The guidance would require revenues for the last nine months to reach $80 to $90 million, or the equivalent of $30 million quarterly at the high end of the forecast.

Even more the company forecasts being cash flow positive in 2024 despite another quarter of large losses and low margins. Cronos reported a Q1'23 adjusted EBITDA loss of $17 million, though down from $19 million last Q1.

The company cut operating expenses by $29 million in 2022 and is on the path for another $20 million in savings for 2023. Considering the gross profit is nearly non-existent at only $2 million, Cronos can't really cut the operations into success.

The Q1'23 earnings call contained a lot of troubling discussions on new product launches inherent in the cannabis space where a company constantly chases new categories at diminished margins without achieving the forecasted growth rates. Cannabis consumer behavior is constantly evolving, but a company won't make profits having to rollout new products to maintain sales.

Per CEO Mike Gorenstein on the Q1'23 earnings call, the big revenue growth forecasted for 2023 is all based on these new products as follows:

So, yeah, we're confident in the revenue guidance of $100 million to $110 million for the full year 2023, driving some of that back half improvement, you've highlighted. We've introduced a meaningful number of new innovations over the last six months, but we have also the strong pipeline of innovation launches planned for the remainder of the year to help fuel that additional growth.

Cronos Is Acting Like A Bank

The amazing part of the guidance for positive cash flows in 2024 is the large interest income. Cronos guided to $30 million worth of interest income in the last 3 quarters of 2023 amounting to $10 million per quarter after producing over $11 million in Q1.

The Fed is forecast to actually start cutting interest rates, suggesting income will only decline going forward. Either way though, Cronos is utilizing the $836 million cash balance to improve the quarterly cash flows of the business.

The company has a significant asset base to where positive cash flows will allow Cronos to build upon the asset base without having cash constantly burned. The company already has interesting investments in PharmaCann, Vitura, and Cronos GrowCo to build upon the large cash balance.

The problem is that the market doesn't want to invest in cash and stock valuations don't usually reflect investments and assets very well. The stock has a negative enterprise value, with Cronos worth ~$750 million and the current cash balance easily exceeding the market cap.

Regardless, the company has a business with an $80 million annualized sales rate and large adjusted EBITDA losses. Investors just won't find much interest in the stock at these levels due to Cronos operating an unappealing business lacking growth and profits.

Takeaway

The key investor takeaway is that Cronos Group has now fallen below $2 despite the large cash balance now throwing off strong interest income. The stock market won't find much appeal in the stock until the company resolves the large adjusted EBITDA losses via growing the cannabis business, not via cutting costs.

Investors should continue watching the stock from the sidelines until the company is more than just a bank.

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