Cronos Earnings: Overhead Cost Cuts Are Helping, but Growth Concerns Keep Profitability Away

No-moat Cronos CRON reported first-quarter 2023 results, highlighted by slow top line growth and continued losses. Revenue declined 20% to $20 million, made worse by the currency effect of a stronger U.S. dollar. Adjusted EBITDA losses narrowed $2 million to $17 million. Although the company made better progress than we expected on overhead costs, sluggish sales growth and gross margins that have been slower to recover than we expected weigh on our forecast. We’ve cut our fair value estimates to $3 and CAD 4 per share, down from $4 and CAD 5.50, respectively.

The stock looks undervalued in 4-star territory, with a net cash position of more than $800 million and a market capitalization of about $700 million; the current market price implies the company is going to destroy value. While this will be the case in the near term, it overlooks long-term growth.

Still, we see 5-star opportunities elsewhere among American multistate operators and Canadian licensed producers. Additionally, these other cannabis producers have larger revenue bases for which to scale profitability against, a challenge that Cronos faces as the smallest company under our coverage.

The company has guided to full-year revenue of $100 million to $110 million for the year, and we expect it to reach the low end. Still, this implies better growth in the rest of the year, so we could cut our revenue forecast if new product launches fail to deliver as management expects. That would likely push our expectations for full-year positive adjusted EBITDA, which doesn’t occur until 2027 in our forecast, out even further. Cronos also guided toward net change in cash for the rest of the year will decline less than $25 million and will be positive in 2024. We think the 2023 target is likely amid declines in capital spending, but don’t see cash increasing in 2024 as profitability remains distant.