Cronos Shows Respectable Progress on Narrowing Losses

Cronos’ CRON full-year 2022 net revenue after excise taxes and adjusted EBITDA loss of $92 million and $81 million, respectively, weren’t far from our forecast revenue of $93 million and adjusted EBITDA loss of 77 million. With few surprises during the quarter, we’ve largely maintained our long-term forecasts and hold our fair value estimates of $4 and CAD 5.50 for no-moat Cronos. The stock looks undervalued in 4-star territory, but we see 5-star opportunities elsewhere among American multistate operators and Canadian licensed producers.

2022 revenue grew by about $18 million, but adjusted EBITDA losses fell (that is, improved) by about $80 million, an impressive feat that reflects the company’s cost efforts. But it will naturally become increasingly difficult to find the next cost savings opportunity. And the company still has a long way to go to reach breakeven adjusted EBITDA with a current margin of negative 88%. We forecast the company won’t reach this important milestone until 2026.

Cronos’ relatively smaller size will prove to be a challenge on the path to profitability. Sales are less than one fifth of Tilray’s, less than one third of Canopy’s, and about half of Aurora’s. Scale is important, both to drive per-unit costs lower but also for leverage across overhead expenses. Lower revenue also makes it harder to invest as substantially into the business.

On the positive size, Cronos has a hefty balance of $878 million in cash and short-term investments. So, the threat of equity dilution is low, especially compared with some its cash-strapped peers. At the end of 2022, share count rose by 2%, compared with Aurora, which pushed its share count 65% higher over the same period.