While most broader indices trade near all-time highs, Canadian cannabis stocks continue to burn investor wealth in 2024. Ever since Canada legalized marijuana for recreational use in 2018, several cannabis stocks have lost over 80% in market value. For instance, Cronos (TSX:CRON) stock is valued at $1.5 billion by market cap today and is down 87% from record highs.
While the drawdown might be attractive to contrarian investors, Cronos and its TSX peers continue to wrestle with industry-wide issues such as product oversupply, high inventory levels, competition from illegal sales, and negative profit margins.
In this article, I dive deeper to analyze why Cronos is a TSX stock I wouldn’t touch with a 20-foot pole in 2024.
How did Cronos perform in Q1 of 2024?
Cronos Group’s net revenue in the first quarter (Q1) totalled $25.3 million, up 30% year over year. The company’s top-line growth was attributed to robust sales in Canada and Israel. Cronos explained higher cannabis flower and extract sales in Canada and Israel allowed it to offset an adverse price/mix in the Canadian cannabis flower category.
Cronos exited the low-margin hemp-derived CBD (cannabidiol) segment in the U.S. in Q2 of 2023, allowing it to report a gross profit of $4.5 million in Q1, up $1.6 million year over year. Cronos stated, “The increase was primarily due to higher cannabis flower and extract sales in the Canadian adult-use market, higher cannabis flower sales in Israel and favourable labour, overhead and inventory variances, partially offset by an adverse price/mix in the Canadian cannabis flower category driving increased excise tax payments as a percentage of revenue.”
Cronos reiterated its operating expense savings target of $5 million and $10 million in 2024, driven by savings in general expenses and research and development.
Cronos remains unprofitable
At first glance, Cronos Group’s quarterly results might seem impressive. However, while Cronos has reduced its cost base, the company still reported an EBITDA (earnings before interest, tax, depreciation, and amortization) loss of $10.66 million, compared to a prior-year loss of $15.6 million.
Compared to their counterparts in the U.S., Canadian marijuana producers are struggling to post consistent profits. For instance, Green Thumb Industries (CNSX:GTII) is among the largest pot producers in the U.S. and reported a gross margin of over 50% in 2023. Green Thumb has also reported consistent net profits in the last five quarters, which indicates stronger pricing power and lower operating expenses compared to Cronos.
Due to its negative operating margins, Cronos has had to raise equity capital several times in the last few years. Cronos ended Q1 of 2024 with $855 million in cash, providing it with enough room to burn more cash before it turns profitable.
Is Cronos stock a good buy?
Investors are bullish on cannabis stocks as there is a good chance for the U.S. to legalize marijuana at the federal level, providing Cronos and other domestic players to enter the world’s largest cannabis market.
However, the much-awaited decision might be a few years away, after which Cronos would still have to compete with incumbents such as Green Thumb and Cresco Labs.
