While pot stocks have been impacted by an elongated bear run, early investors have made a fortune. Canadian cannabis stocks rose by an exponential rate right up until recreational marijuana was legalized in the country in October 2018.
Cronos Group (TSX:CRON)(NASDAQ:CRON) has returned a whopping 9,520% since its IPO. The stock was publicly listed at a price of $0.1 per share in July 2014 and has since risen to $9.62 per share. This means if you invested $500 in Cronos Group’s IPO, it would have been worth just over $48,000 as of February 20, 2020.
These returns are really mouth-watering. Now, imagine if you had sold Cronos stock at its record high of $32.6. Your investment of $500 would have returned a massive $163,000 in just under five years. This indicates a total return of 32,500%.
While Cronos has generated astonishing returns, we know it is impossible to time the market. A handful of investors would have bought the stock during IPO and sold at its record high in March 2019.
The important question that needs to be answered is if Cronos stock can continue to generate exponential returns for current investors.
Cronos stock is trading at a high valuation
Cronos stock is currently trading 70% below its 52-week high. The sell-off in the cannabis space was driven by a multitude of reasons. Investors were concerned over sky-high valuations of pot stocks, which prompted the sell-off.
Several companies were then hit by regulatory issues, lower-than-estimated sales, rising losses, high inventory levels, the vaping scandal, and more. Despite the persistent bear run, a few pot companies, including Cronos Group, are trading at expensive multiples.
Cronos stock has a market cap of $3.3 billion and is valued at 91 times forward sales. Analysts expect the company to increase sales by 208.2% to $36 million in 2019 and by 210% to $111.55 million in 2020.
In case Cronos stock doubles by the end of this year, it will be valued at 59 times 2020 sales, which is still an astonishing multiple. Cronos stock, however, has several things going right for it.
What next for investors?
The company is set to grow sales at a stellar pace. It has a cash balance of $2 billion and debt of just $10.54 million. Similar to most marijuana companies, Cronos is struggling to be profitable, but it has enough reserves to sustain top-line growth in the near future.
In late 2018, cigarette giant Altria pumped in $2.4 billion into Cronos for a 45% stake in the company. This was the second-biggest deal in the cannabis space just below Constellation Brands’s US$4 billion investment in Canopy Growth.
Altria’s investment was aimed at growing Cronos Group’s distribution footprint and global infrastructure. Cronos continues to invest heavily in capital expenditures (capex). Its capex has risen from $42.7 million in 2017 to $114 million in 2018. Capex is estimated at $65.7 million in 2019, $67.8 million in 2020, and $97.1 million in 2021, according to consensus forecasts.
Cronos stock has lost significant market value in the last year. Investors can expect pot stocks to be volatile in the short term but the market opportunity and future growth prospects continue to be enticing.
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
The Motley Fool recommends Constellation Brands. Fool contributor Aditya Raghunath has no position in the companies mentioned.