Raymond James analyst Rahul Sarugaser remains confident in Cronos Group (Cronos Group Stock Quote, Chart, News, Analysts, Financials TSX:CRON), maintaining his “Outperform 2” rating in an update to clients on Wednesday.
Founded in 2012 and headquartered in Toronto, Cronos Group is a Canadian licensed producer of cannabis which aims to commercialize cannabis and cannabinoids in multiple international markets for adult-use.
Sarugaser’s most recent update comes after Cronos released its first THC+CBG gummy under its SPINCHFEELZ brand through its partnership with Ginkgo Bioworks Holdings (Ginkgo Bioworks Stock Quote, Chart, News NYSE:DNA), becoming the first marketed edible in Canada to include cultured CBG.
“While we do not cover individual adult use cannabis SKU launches—preferring to focus on companies’ net retail sales performance—given that CRON has explicitly indicated that it sees the Canadian market as a product testing ground, this launch of CRON’s fermentation-derived gummy is a milestone not just in the Canadian context, but a U.S. and global context too, as CRON looks to (eventually) broaden marketing and distribution,” Sarugaser said.
Presented as the SPINACH FEELZ Chill Bliss 2:1 THC|CBG gummies, the product will feature a Pineapple Starfruit flavour, and is available in Alberta, British Columbia, Manitoba, Ontario and Saskatchewan in two-packs containing 10 mg THC and 5 mg CBG per package, with an aim toward to producing a full line of cannabis products featuring rare cannabinoids in a wide range of product formats.
The partnership between Cronos and Ginkgo originally came to fruition through an agreement signed in September 2018, which helped Cronos become a top-tier organization in the cannabinoid innovation industry. Shortly thereafter, Cronos received a $1.8 billion investment from Altria, which Sarugaser believed to be in part supported by Ginkgo’s technology.
The agreement has also proven fruitful for Ginkgo, as the company achieved target productivity levels of its first cultured cannabinoid, CBGA, triggering a payment of 1.5 million Cronos group shares issued to Ginkgo, valued at approximately US$9.3 million.
“Today we mark an incredible achievement for Cronos Group and the cannabis industry at large with the launch of the first cannabis edible in Canada to feature cultured CBG. This new product is truly a breakthrough in cannabis innovation,” said Kurt Schmidt, President and CEO of Cronos Group in the company’s October 20 press release. “We are delivering on our ultimate goal to introduce exceptional products that will unlock the full potential of cannabis and we look forward to bringing more rare cannabinoids to market under the SPINACH FEELZ™ sub-brand.”
Sarugaser made specific note of what he perceives as Cronos Group’s competitive advantage in the cannabis product market, with Ginkgo’s technology helping the company produce certain limited quantity molecules where the company’s domestic and American peers continue to focus on botanically-derived products (i.e. cannabis plant-derived extracts of THC/CBD infused into edibles, beverages and vapes, which have significantly smaller quantities of the necessary molecules.
“With the fermentation-derived CBG products now hitting shelves, the full power of Ginkgo’s cell engineering teams will be applied to CRON’s next target cannabinoids: CBC, CBD, THC, CBGV, CBCV, CBDV, THCV,” Sarugaser said. “Continuous improvement of CRON’s production processes at Cronos Fermentation in Winnipeg will further improve cannabinoid productivity levels through the manufacturing lifetime of these products, with learnings from each cell program informing the optimization of all others.”
Sarugaser projects the company’s financial picture to improve with time, as he forecasts the company’s 2021 revenue to be $67 million for a potential year-over-year increase of 42.6 per cent. However, he expects that figure to more than double in 2022, projecting revenue of $145 million.
Meanwhile, with continued investments and development, Sarugaser continues to project EBITDA losses for Cronos, with forecasted losses of $164 million in 2021 and $145 million in 2022.
Sarugaser’s valuation data shows similar trends, with the EV/Revenue multiple projected to drop from the reported 32.6x in 2020 to 22.9x in 2021 and 10.5x in 2022, while the EV/EBITDA multiples remain as negative projections for both 2021 (-9.3x) and 2022 (-10.5x).
Through its continued partnership with Ginkgo Bioworks Holdings, Sarugaser believes Cronos Group is positioned as a market maker for cannabis products moving forward.
“With this first introduction of CBG-based products into the Canadian adult-use cannabis market, here we see the market-makers starting to introduce the first generation of minor cannabinoid-based products,” Sarugaser said. “Next will be the pipeline of other ‘minors’ that, as we see it, will constitute the future of derivative cannabis products with CRON at the vanguard, auguring well for its domination of future derivative cannabis-product markets.”
Overall, Cronos Group’s stock price has dropped by 28.3 per cent over the course of the year, steadily declining throughout 2021 after hitting a high point of $19.77/share on February 10.
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