Cronos Misses: And They All Fall Down

Cronos missed its earnings numbers by some $0.23 per share.  Revenues went up.  However, for this $4B company, this may be the first straw that brings all of the cannabis stocks down.  While I was initially optimistic on Cronos when $CRON was far lower in price, my tune is changing significantly given the continued developments in its financials.  

I wanted to put together a quick analysis and break down where $CRON sits now that they’ve printed their annual numbers; It’s bad.

What is most important in this is that the cannabis stocks have all pushed higher recently because of the Blue Wave that swept through the Federal government and the hopes of Federal legalization.  Then, in February, Redditers came in and pushed valuations upwards into levels that are not in line with basic fundamentals.

CRON will sell off
CRON will sell further

These stocks have been coming down over the past few days; there is still more room for selling. And, now we have the bigger cannabis companies printing their annual earnings numbers.  These numbers are starting to point to a bleak picture for the bigger companies.  

I have a listing of about 250 cannabis stocks.  I am working through detailed analysis on each of these companies to determine which will be a winning investment and which companies are going to be dust in the wind.  I have found about 12 – 15 very strong companies that I am putting together in a model portfolio.  Cronos will not make the cut.  The companies that are in this portfolio are seeing excellent buying opportunities because of the bigger companies selling.

Let’s get into Cronos and let me show you some numbers to break this down so you have a firm understanding of what is going on with the company.  Then, you can see for yourself how the cannabis industry is going to play out.  

An Annual Review

I put together an interesting little quick chart:

CRONOS Financial Numbers

Let’s break this down:

  • Cronos sold $54M for the year in cannabis;
  • They paid $7.6M in taxes;
  • This left Cronos with $46,719 in net revenues;
  • The cost of producing the $46,719 was $46,497;
  • They then wrote down $26,055 in inventory as a loss;
  • Finally, they had SG&A and other operational costs of $153,514

So, basically, Cronos sold some product that cost them 100% to make.  Then, they wrote down ~55.7% of their revenues in losses from inventories.  After all, cannabis is an organic product.  It has a shelf life.  That shelf life is packed in to the water content within the cannabis; ~85% is the target dryness that the company wants to achieve.  But, if this product sits around too long it continues to dry and is no good.  Then, after the write-downs, Cronos factored in an additional $153M in costs that they incurred to run operations.

Are you kidding me?

The biggest thing that stood out to me is that Cronos grew from last year to this year.  And, that growth brought in losses that were worse than the year before!

This is the continuous problem I see with these larger cannabis companies is that they had such deep pockets that they built massive production capabilities.  However, they did not scale their growth to what the market could bear but instead, they just built facilities that would hit target sales numbers and margins in the future.  These larger operations are merely hemmhoraging cash as they try and sustain these facilities.  Worse, the quality of the product is inferior to the smaller players that are more localized and require higher inputs such as time and attention by the growers.  These bigger corps. simply cannot duplicate quality on the same kind of scale as the smaller producers.

Further, and this is my thesis overall, these smaller grow facilities have scaled-up more appropriately and so are not servicing large facilities that are not profitable.  These smaller companies garner very little public attention; there are some 250 of them.  Trust me, CNBC will not cover them all.  So, they get largely overlooked.  And, that is the opportunity… if you are willing to put in the time to scrutinize each and every one of these companies.

In the meantime, the numbers we will see from all of the other major players are very likely to look the same as Cronos.  These disappointing numbers will weigh heavily on the broader market.  I am calling a short across the board with these bigger companies. I will put up analysis over the course of the days and weeks as they print their numbers.

Companies like Canopy Growth, Aphria, Tilray, and others are likely to see significant share losses in the coming days.  There are other variables at play that are going to generally factor into the cannabis industry and cannabis investing.  I wrote up an analysis on the Treasury yield and how that is moving higher and higher; this will affect the broader stock market across the board.

Canopy Growth will sell off

This analysis is not as thorough as I normally will put up on this site simply because the breakdown of the numbers I got out of SEDAR requires too much calculator work for right now.  I will do more on Cronos in a few days.  If you are long $CRON, you may want to reconsider your position; there is potential that things get ugly.

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