Raymond James analyst Rahul Sarugaser is confident in Cronos Group (Cronos Group Stock Quote, Chart, News, Analysts, Financials TSX:CRON), maintaining his “Outperform 2” rating and US$11.00/share target price with a projected return of 48 per cent in a recent update to clients on August 7.
Founded in 2012 and headquartered in Toronto, Cronos Group is a Canadian licensed producer of cannabis that aims to commercialize cannabis and cannabinoids in multiple international markets for adult-use.
Sarugaser’s most recent update comes after Cronos released its second quarter financial results on August 6, where the company’s topline was a modest beat of the analyst’s estimate and EBITDA was a wide miss.
Cronos Group reported $q5.6 million in revenue for the second quarter, registering a three per cent share of the Canadian adult use cannabis market while on the American side, Cronos accounts for 0.23 per cent of revenues on CBD products at $2.2 million. (All figures in US dollars except where noted otherwise.)
While the company also reported a $42.5 million loss in adjusted EBITDA, Sarugaser notes that Cronos remains primarily in the product and market development phase of its evolution, with less of a focus on revenues and more emphasis on strategic initiatives like its upcoming partnership with synthetic biology company Ginkgo Bioworks to produce large scale cannabinoids by fermentation.
Furthermore, Sarugaser said Cronos is on track to meeting its September timeline for optimized CBG production at its Cronos Fermentation facility and expects to have its first fermentation-derived, CBG-containing products on shelves before the end of the year.
“This quarter, Cronos Group continued to bring high-quality and insight-driven products to market. I am particularly proud of the Spinach brand gummy innovation launched this quarter into the Canadian adult-use market, SOURZ by Spinach, which has quickly jumped to be one of the most desirable products in the edibles category,” said Kurt Schmidt, Cronos Group President and CEO, in the company’s August 6 press release.
“In the U.S., we officially re-launched PEACE+ in the direct-to-consumer channel, which rounds out our different pricing tiers for the U.S. hemp-derived CBD market. Having brands across price points and usage occasions is critical to meeting consumer needs in the CBD category,” he said.
“Our U.S. growth strategy focuses on delivering long-term shareholder value by assembling a best-in-class brand and intellectual property portfolio and positioning to deploy our products in the U.S. market through investments and opportunities with companies that share our vision and commitment to responsibly distributing disruptive cannabinoid products that improve people’s lives,” Schmidt added.
Cronos Group also announced a change in its executive team on the same day as its quarterly reports were released, bringing in Bob Madore to replace Jerry Barbato as the company’s Chief Financial Officer, with Madore having held the title with American Eagle Outfitters Inc. from 2016 to 2020.
The most recent quarterly results have also prompted Sarugaser to adjust some of his financial metrics, with revenues now projected to reach $66.5 million for 2021, marking a 42.4 per cent year-over-year increase over the $46.7 million reported in 2020. Sarugaser projects an even bigger leap for 2022, a 117.9 per cent jump to $144.9 million, with similar growth forecast through 2025; the $359.1 million in projected revenues for 2023 represents a 147.8 per cent projected year-over-year increase, followed by a projected 89 per cent year-over-year increase to $678.7 million for 2024, followed by a 39.8 per cent year-over-year increase to $948.6 million in projected revenues for 2025.
Cronos Group’s adjusted EBITDA figures project to remain negative through 2023 ($164.4 million projected loss for 2021, $144.7 million projected loss in 2022, and $39.7 million projected loss in 2023) before turning positive in 2024 ($169.7 million projected) and 2025 ($294.1 million projected).
Sarugaser forecasts the company’s EV/Revenue multiple as being on a downward trend, dropping from 32.6x in 2020 to a projected 22.9x in 2021, then dropping again to a projected 10.5x in 2022. Meanwhile, with EBITDA still in the negative, Sarugaser forecasts the company’s EV/EBITDA multiple to also be negative, moving from -10.3x in 2020 to a projected -9.3x in 2021, then back to a projected -10.5x in 2022.
Despite the losses, Sarugaser is confident in Cronos’s market moving forward.
“We expect cultured cannabinoids to be completely fungible with native cannabinoids in most products, so we believe CRON’s cannabinoid input costs will reduce over time, widening margins,” he said. “The upside potential here, however, is massive in our view. With fermentation-conferred consistency and purity of its active ingredients—some of which are basically inaccessible in nature—we expect CRON’s world-class product innovation team to continue formulating increasingly differentiated products with stricter quality parameters than most of its cannabis industry peers.”
At press time, Cronos Group was trading at C$8.22/share on the Toronto Stock Exchange, up 15 cents from its Friday closing of C$8.07/share. However, Cronos stock is down C$1.48 (15.26 per cent) for the year to date, with a high point of C$19.77/share coming on February 10.
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