We came across a bullish thesis on Cronos Group Inc. (CRON) on Raging Bull Investments’ Substack by Jake LaMotta. In this article, we will summarize the bulls’ thesis on CRON. Cronos Group Inc. (CRON)’s share was trading at $2.01 as of Nov 15th. CRON’s trailing P/E was 65.31 according to Yahoo Finance.
A close-up of a package of cannabis accessories, displayed on a brightly-lit retail shelf.
Cronos Group presents a compelling investment opportunity, with its fundamentals improving despite persistent challenges in the cannabis industry. The company’s Q3 results highlight its strong growth trajectory, with net revenue increasing 38% year-over-year to $34.4 million. While approximately $4 million of this growth is attributed to the consolidation of GrowCo, the remaining growth—reflecting a 25% annualized run rate improvement—stems from increasing market share in Canada. Notably, Cronos has managed this growth while reducing operating expenses by $3 million year-over-year (adjusted for non-cash impairments), significantly improving EBITDA from -$15 million to -$6 million. This operational efficiency, coupled with its top brand Spinach’s leading market position in Canada and a 17.2% share in the edibles segment, underscores the company’s ability to outmaneuver competitors in a challenging pricing environment.
The recently renegotiated supply agreement with GrowCo marks a strategic shift that positions Cronos to lower production costs materially. Meanwhile, its balance sheet remains an undeniable strength, boasting $862 million in cash—exceeding its current market capitalization—and additional value in loan receivables and real estate assets, with no debt obligations. This creates a meaningful discount to its liquidation value, offering a robust margin of safety to investors.
Cronos has demonstrated resilience amid depressed cannabis prices, growing revenue through volume and market share rather than pricing power. This contrasts with weaker players like Canopy Growth, which has seen domestic revenues decline. While the Canadian cannabis market remains irrational due to overregulation, high excise taxes (consuming 30% of Cronos’ topline), and competition from the illicit market, these challenges could eventually trigger much-needed rationalization. Companies with weaker financials are likely to be flushed out, and Cronos is well-positioned to benefit from pricing normalization, which would directly enhance profitability.
Investor sentiment remains excessively pessimistic, as evidenced by the recent sell-off following U.S. election results, despite Cronos having minimal U.S. exposure. Concerns over Florida’s rejection of cannabis legalization and fears of a conservative U.S. administration have spilled over irrationally into Cronos’ valuation, even though domestic fundamentals remain the focus. Speculation about potential cannabis deregulation under a libertarian-leaning Republican administration offers an additional upside catalyst, though it is not central to Cronos’ near-term thesis.
The Canadian regulatory environment, while frustrating, may also see improvement with a potential change in government. Overhaul of the excise tax system to align with alcohol and tobacco could turn Cronos EBITDA-positive even without price increases. However, such reforms remain uncertain under the current administration, which has been slow to act in support of the legal cannabis industry.
In summary, Cronos stands out as a rare net-net opportunity in a high-growth sector, offering limited downside risk due to its balance sheet strength while capturing market share and improving efficiency. The long-term prospects for industry rationalization and regulatory reform further bolster its case, making Cronos an attractive investment for those willing to navigate the current headwinds for potentially outsized rewards.
Cronos Group Inc. (CRON) is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 12 hedge fund portfolios held CRON at the end of the second quarter which was 11 in the previous quarter. While we acknowledge the risk and potential of CRON as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than CRON but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.