Cronos Group CRON stock has had a rough go at getting the company to being a solid cannabis producer. But, this looks set to change as there are many factors that are moving forward. So, I wanted to put together the CRON stock forecast to see if what a potential investment in CRON stock could mean for your cannabis investments.
There are a few bullet points that I want everyone to keep focused upon when you think of Cronos Group, and I will break each of these down individually because when you put these together, they paint a solid picture for CRON stock. These individual breakdowns will be in the appropriate section below.
- What are Fixed/Variable Costs
- Gross Margins Broke above negative
- Operating Efficiencies are 150%
- CAD$119M Write-Down
- $1B Cash – 374M Shares
As I mentioned, there is now some momentum and I think that Cronos Group can get there finally. Plus, they are sitting on a mountain of cash which can only propel the company forward.
Cronos CRON Stock Financial Data
What is the difference between fixed & variable costs? This is an important subject to think about when you are looking at a company to invest in.
Fixed costs are those recurring costs that no matter how much product you produce, the fixed costs remain the same. For instance, rent on a building such as both the production facility and the corporate offices. If a company has $1M in rent for two buildings, but sells only $1.00 in products, they still have to pay the rent.
Variable costs are costs that may go up or down with relation to the amount of product produced. Think about all of the packaging for all of the products being produced, or the labor costs, or the costs to run machines. If a company produces 100 units, they may incur a certain amount of costs. But, what if that company produces 10x more products? That company may incur additional cost. However, not necessarily 10x more costs. One employee, for instance may cost a certain amount per hour, but produce more products in that same hour relative to previous production levels.
keep these thoughts in mind as we move through the financial data.
Cronos Gross Profits
Gross margins have broken through zero and I believe that if there is continued revenue gains, we will see additional gains in gross margins. Economies of scale mean that as more product goes through the system, there is more optimization & utilization of production methods that translates to more profits.
Fixed costs are fixed and the fact that gross margins are starting to clear certain levels on the back of higher revenues – a large 25% increase QoQ – this, will translate further down the financial statement.
Cronos Operating Profits
Operating costs are still exceptionally high relative to revenue. But, this is math. Looking at operating costs, they remain relatively flattish. And, operating efficiencies, hitting above 150%, are relative to revenue. If revenue moves higher, while management contains back-office costs, this will translate into more improved operating efficiencies (Since it is a mathematical ratio you are looking for the lowest number possible).
The best companies are printing approximately 30% – 35% in operating efficiencies. I would think that if revenues quadrupled, this would drive operating efficiencies to competitive levels. But, getting revenues to that level will take time.
However, keep in mind the shear magnitude of the cash & assets Cronos has in its war chest.
Cronos EBITDA & Net Profits
In order to gain EBITDA profitability, Cronos will need to improve its gross margins first, and then grow into its operating costs. Again, this will take time.
In the meantime, Cronos wrote off a line of product and that cost a whopping $119M in write-downs. This is where the bulk of the losses stem from. This is a one-off. From here, it should be continued focus on the current products, progressively focusing on distribution, and growing premium products.
It will take some time to get to EBITDA profitability, but with the big increase in revenue, should this tenacious work continue, Cronos Group will get there. And, CRON Stock will move higher.
Cronos Cash On Hand
This is one of the gems that I am focusing on with Cronos: Cash on Hand. First, there are some 374M shares outstanding. Next, there is some $1B in cash with an additional $400M in assets. The stock is trading at $3.47 (at the time of this writing). That means if Cronos group decided to sell out of everything and return cash to its investors, this would mean that the stock is trading just below the value of all of the cash & assets. This minimizes risk considerably for a potential investor in CRON stock.
Plus, just to reiterate, Cronos has $1B in cash. Once the corner gets turned with its core business, they can begin to push very aggressively into acquisitions.
Cronos Total Equity
As I mentioned just above, Cronos Group is sitting on a ton of cash. And, they have sufficient assets to propel them forward. And, when you consider book value of cash & assets, on a per-share basis, CRON stock is a low-risk investment at this point. The capability of management to push forward with its cash and create more assets to grow revenues will be crucial.
There are a couple of other companies that I have on my list that I believe will eventually turn into powerhouses simply because of their cash position; Sundial Growers SNDL Stock to name just one. However, having cash is not necessarily panacea; Canopy Growth CGC stock being a perfect example of that.
Cronos CRON Stock Forecast
As I will be doing on the website for all of the stocks I cover, I continually put together Discounted Cash Flow statements generated from Discounted Cash Flow Calculators. For your convenience, I have listed these all in a separate page: Most Undervalued Cannabis Stocks.
However, one of the precursors to me doing a DCF is achieving EBITDA profitability, or a roadmap to that. Cronos Group is no where near that; I cannot do CRON Stock Forecast at this time.
Is Cronos CRON Stock A Good Investment?
I believe that Cronos has the ability to move higher. Cannabis stocks are set to start moving with the noise turning down a bit in Eastern Europe and this is allowing overall cannabis stocks and the broader market to move higher.
If Cronos can continue higher with revenue gains and continue to improve its margins this stock will start to trickle higher. And, with $1B in cash on hand, Cronos can really start to exercise its strength and start to acquire other assets and grow.
Personally, I am not looking for another big stock to get into. But, I can easily see why Cronos stock will go higher. But, I will pass not because I don’t think CRON stock is not going higher but, that I am fully in on cannabis stocks.