Raymond James analyst Rahul Sarugaser has made an unusual comparison, likening cannabis player Cronos Group (Cronos Group Stock Quote, Chart, News TSX:CRON) to Apple in the 1970’s.
The analyst says anyone looking too closely at recent quarterly numbers from Cronos) may be missing the forest for the trees, says Raymond James analyst Rahul Sarugaser who in a Friday update to clients said Cronos’ technology and intellectual property will dominate the market.
Toronto-headquartered Cronos released its first quarter 2020 numbers on Friday, posting revenue of $8.4 million compared to $7.3 million for the previous quarter and $3.0 million for Q1 of 2019.
In his quarterly comments, CEO Mike Gorenstein highlighted CRON’s soon-to-be entry into Israel’s medical marijuana market while saying that the company is focused on long-term and sustainable growth.
“Despite the challenges and uncertainty posed by the COVID-19 pandemic, we remain agile and focused as a business. Our brand portfolio continues to launch innovative products to consumers as we adapt to an online-first distribution model in both the U.S. and Canada,” Gorenstein wrote in a press release.
“We remain well-positioned and committed to generating sustainable, long-term value for shareholders and are confident 2020 will be a successful building year for Cronos Group,” he said.
Other notable numbers from the Q1 were adjusted EBITDA which came in at a $37.1-million loss and an inventory write-down of $8.0 million on its dried cannabis and extracts, caused by pricing pressures in the market, which management said would likely be repeated over the near term. The company finished the quarter with cash and equivalents of $1.128 billion and no debt. (All figures in US dollars.)
Comparing with Sarugaser’s forecast, Cronos’ Q1 came in lower on both revenue and EBITDA. CRON’s $8.4 million top line and negative $37.1 million EBITDA compared to the analyst’s estimates of $12.7 million (consensus $11.8 million) and negative $16.8 million, respectively.
In his report, Sarugaser focused on Cronos’ technology and IP advances, which, through its partnership with Ginkgo Bioworks, has plenty of potential. Cronos announced in the first quarter report that Ginkgo has successfully engineered its first set of organisms to produce cannabinoids by biosynthesis, a goal which many companies are currently striving towards.
Cronos said the new organisms have been transferred to CRON’s large-scale production and processing site in Winnipeg.
“The importance of this technology transfer to Cronos Fermentation cannot be understated,” wrote Sarugaser. “This is a $100-million investment made 18 months ago that is beginning to bear fruit. This is a big development. We recommend investors take note.”
The analyst argued that this biosynthesis technology will “propel Cronos to he forefront of the cannabinoid consumer product space not in five years, but maybe two.”
“Looking at 1Q20 earnings this morning, we glance at the numbers—tepid revenue, some write- downs, a big gain from warrant revaluation — but fix our gaze firmly on the long- term investments CRON made early on (even before its alliance with Altria) that are beginning to bear fruit,” Sarugaser wrote.
“Also, let’s remember that CRON’s big partner, Altria, derives from a 100-year-old business: CRON and Altria are plotting ownership of the cannabis sector, not today, not next quarter, but five, ten, 15 years from now. For a company thinking about the future the way CRON does, we believe for one to put a microscope to its near-term revenue is like interrogating early sales of the Apple II ca. 1977 to get a view on its maker’s—or the PC industry’s—potential future value. Red herring. Anyone interested in buying pre-IPO AAPL shares?” he wrote.
With the update, Sarugaser has maintained his “Sector Perform 3” rating and provided a target price of $6.50 for CRON, which at the time of publication represented a projected return of 20 per cent.
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