Cannabis investors have seen a massive decline in wealth over the last year. Several pot stocks are down 80% due to structural issues. However, early investors of Cronos Group (TSX:CRON)(NASDAQ:CRON) have generated monumental returns despite a 70% decline in market value since March 2019.
Cronos stock went public on the TSX at a price of $0.10 in July 2014. The stock is currently trading at $8.59, which indicates a return of a whopping 8,490%. So, if you invested $1,000 in Cronos IPO, the investment would have ballooned to a mammoth $84,900 today.
Cronos stock was trading at record highs in March last year. If you bought the stock at $0.1 and sold it at a high of $30, the returns would be close to 30,000%.
Market timing is difficult or close to impossible. We have seen IPO investors would have generated multi-fold returns. At the opposite end of the spectrum, investors buying the stock in March 2019 would have lost 72% in market value.
Past returns matter little to prospective investors. So, let’s see if Cronos remains a solid buy at the current price.
A look at Cronos’ recent results
Earlier this month, Cronos stock announced its first-quarter results and reported revenue of US$8.4 million. This was 180% higher than the revenue of US$3 million in the prior-year period. Cronos reported earnings per share of US$0.20. Comparatively, analysts estimated the cannabis giant to post revenue of US$10.8 million and EPS of US$0.07 in Q1.
This massive earnings beat was primarily due to an accounting adjustment. Investors should note that the company continues to post an operating loss. In the March quarter, Cronos’ positive net income was due to a change in fair value of deliverables while its operating loss stood at US$45 million.
The net income was propelled by a US$113 million gain on Altria’s billion-dollar investment in Cronos and the resulting change in the value of warrants held by the tobacco heavyweight.
Cronos’ operating loss widened from US$10.12 million in March 2019 due to a significant increase in operating costs. In the Q1 of 2020, the company’s sales & marketing expenses rose 530% while research and development expenses were up 292%. Its general and administrative expenses rose 226% as well.
What next for investors?
Cronos is backed by tobacco giant Altria which picked up a 45% stake last year. This investment ensured the former’s cash balance remains robust at US$1.12 billion, giving the pot stock enough leeway to improve profitability going forward.
The company’s cash balance also affords it an opportunity to grow inorganically via acquisitions. Further, Altria’s expertise in tobacco will be instrumental in the product development of cannabis 2.0 products such as vapes.
Similar to most pot companies, Cronos is also targeting the medical marijuana market in Europe to boost sales.
We can see why investors remain optimistic about long-term growth in this market. However, marijuana stocks continue to be impacted by a thriving black market and slow rollout of retail stores in major Canadian provinces. This has driven inventory levels higher and reduced impacted profit margins.
For example, Cronos ended Q1 with an inventory of US $43.1 million, up from US$38 million in the December quarter. The company also had to write-down inventory worth US$7.96 million.
The ongoing COVID-19 pandemic might impact sales in the near-term, potentially resulting in inventory write-downs for the rest of 2020.
The company is part of an expanding addressable market. The cannabis industry is still at a nascent stage and will grow at a rapid rate in the upcoming decade.
The backing of Altria coupled with Cronos’ leadership position and a strong cash balance makes the pot stock one of the safest bets for cannabis investors.
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Fool contributor Aditya Raghunath has no position in any of the stocks mentioned.