The cannabis industry is going through interesting times. After a phase characterized by intense competition, the industry seems to be in a period of consolidation. Further, with increasing prospects of federal-level legalization of cannabis in the United States, there is the possibility of a big market opening up.
Cronos (CRON) is one of the interesting plays in the cannabis industry. Its stock has largely been sideways year-to-date. (See Cronos stock charts on TipRanks)
However, there continues to be positive business developments, and a rally seems likely. I am bullish on Cronos, considering industry tailwinds, and company-specific growth catalysts.
In terms of the industry outlook, the legal cannabis industry is expected to be worth $70.6 billion by 2028. Through this period, the industry is likely to grow at a CAGR of 26.7%.
As more countries legalize cannabis, this estimate is bound to change. In any case, there is a big addressable market, and Cronos seems to be well positioned to benefit from the tailwinds.
Growth in Medicinal Cannabis
One reason to like Cronos is the company’s focus on medicinal cannabis. The company’s Peace Naturals brand is focused on wellness, with presence in Australia, Canada, Germany and Israel.
A lack of evidence-backed medicines has prevented Cronos from really gaining traction globally with its medicincal cannabis thus far.
However, Cronos seems focused on addressing this challenge. As an example, the company has partnered with Technion in Israel. The partnership is already working on pre-clinical research for skin treatment. The initial focus areas are acne, psoriasis and wound healing.
Of course, clinical trials would imply that it would take time for a particular candidate to hit the markets.
In June 2021, Cronos also acquired a 10.5% stake in PharmaCann for $110.4 million. This values the U.S. cannabis company at $1 billion. PharmaCann has six production facilities, and 24 dispensaries in the United States.
Revenue Growth Likely to Accelerate
Even with CRON stock remaining sideways, the company has continued to deliver strong earnings. For the first six months of 2021, Cronos reported revenue growth of 54% to $28.2 million.
Growth was largely driven by international revenue. In the U.S., growth was in the single digits. This is likely to change once cannabis is legalized at the federal level.
The company’s EBITDA losses did widen. However, that’s not a concern for a company still pursuing aggressive investment in sales, marketing, and research.
Cronos reported cash and equivalents of $895 million as of Q2 2021. That is ample cash buffer to navigate the cash burn period, and also pursue aggressive investments. Furthermore, Altria (NYSE:MO) has 45% stake in Cronos. This is an additional source of financial backing.
Wall Street’s Take
According to TipRanks’ analyst rating consensus, CRON stock comes in as a Hold, with one Buy, one Hold and one Sell assigned in the past three months.
The average Cronos price target is $6.29 per share, implying 1.1% upside potential from current levels.
Final Verdict
Cronos has been aggressively launching new products in the recreational cannabis space. This includes gummies, concentrates, and cookies, among others. Under the brand of Happy Dance, Cronos has also launched various skin care products.
The key point here is that the company’s focus is on high-margin, value-added products. If sales gain traction, these products can help in improving the EBITDA margin.
Overall, Cronos seems well positioned to capitalize on the impending growth in the cannabis industry. The company has a strong financial profile to pursue organic and acquisition driven growth. CRON stock therefore seems attractive, after an extended period of consolidation.
Disclosure: At the time of publication, Faisal Humayun did not have a position in any of the securities mentioned in this article
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