Cronos Stock Pulls Back After Earnings, It Might Be Time To Buy Some

Saturday, February 27, 2021 | Thomas Hughes
Cronos Stock Pulls Back After Earnings, It Might Be Time To Buy SomeCronos Faces Near-Term Headwinds

There are market forces coming into play that bear nothing but good things for Cronos Group (NASDAQ:CRON). On the one hand, Canada’s adult-use market is expanding in both scope and depth. On the other, production and capacity are coming into line with the market demand. What this means is that Cronos revenue is growing, its margins are improving, and sustained profitability is closer than ever before. The problem for shareholders is the near-term outlook. Cronos warned that pandemic-driven closures and consumer habits will have an impact on revenue growth. To that, we say, Duh, hasn’t it already been affecting sales and growth worldwide?

Cronos Has A Great 4th Quarter

There is really nothing not to like about the Cronos report once you dig into it. The earnings miss is a concern but one mitigated by growth efforts, but we’ll get to that in a minute. To start with, the Q4 revenue of $17.05 million is up 133% from last year and beat the consensus by 2400 basis points. Strength was driven primarily but sales in the Canadian Adult-use market, Israel’s medical cannabis market, and the company’s forays into the U.S. Sales in the U.S. grew 30% YOY to about 25% of the net while “the rest of the world” grew 193%.

Moving down the report, the company’s margins made a marked improvement over last year due to the combination of efficiencies of scale and reduced markdowns for inventory. The reduced markdowns are particularly important because they are a sign the capacity and production are more in line with the market demand and having less of a negative impact than they once were. At the gross level, the company’s margin improved to -87% from last year’s -275% and is on track for further improvement this year.

On the bottom line, the reported -$0.31 in GAAP EPS is about a quarter shy of consensus but there is a reason. After a year of trimming the fat Cronos, execs decided to invest $11 million into growth efforts in the edibles, beverages, and Israeli markets. This is up from about $1 million last year. In addition to those efforts, Cronos has also inked a deal with Ulta Beauty for shelf space for its growing line of CBD health and beauty products. Ulta Beauty is expected to bring in over $7.5 billion in calendar 2021 and could be a significant tailwind for Cronos.

“We are poised to build upon the growth we experienced in 2020 as we continue to push cannabinoid innovation and differentiated product offerings under our portfolio of brands,” said Kurt Schmidt, President and CEO of Cronos Group. “My goals this year will be to focus on building a winning team by fostering a collaborative, performance-driven culture; continue to focus on creating disruptive technology and innovation; grow and develop our brands and strengthen our ability to compete through R&D, strategic global infrastructure and engaging in the legislative process in key markets.”

The Technical Outlook: Cronos Pulls Back To Support

Like so many other stocks we’ve seen in the market lately, shares of Cronos are pulling back to support despite what was a relatively decent earnings report. The pullback is due in part to the massive run-up in prices over the past month which is, in turn, due to short-covering and the crowd-sourced short-squeeze the cannabis market recently endured. The good news is that price action is fast approaching a level of key support. The $10 level should provide at least a bounce in prices if not a bottom and eventual reversal. Longer-term, Cronos is one of the best-positioned cannabis stocks in the market and on track for sustained profitability.

Cronos Stock Pulls Back After Earnings, It Might Be Time To Buy Some

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Companies Mentioned in This Article

CompanyMarketRank™Current PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
Cronos Group (CRON)0.8$8.36+2.7%N/A34.83Hold$8.75
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