What Is Driving The Rally In Cronos Group’s Stock?

by Trefis Team
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The Cronos Group (NASDAQ: CRON) (TOR: CRON.TO), a vertically integrated Canadian marijuana company, published its second-quarter results on August 14. The company’s financial results are not particularly consequential at the moment, with revenues standing at just $3.4 million for the quarter, up from around $600k in the year-ago period, driven by patient on-boarding, higher prices and growth in its cannabis oil offering. However, the company indicated that it was on track to bolster its capacity expansion, which we view as a key near-term driver to its overall growth.

We have created an interactive dashboard analysis on what’s driving Cronos Group’s valuation, which allows users to modify any of our forecasts and drivers to arrive at their own valuation estimates for the company.

Updates On Capacity Expansion

Cronos needs to aggressively scale up its manufacturing capacity and production volumes, as its home market of Canada looks set to begin the sale of recreational marijuana to adult consumers, and also as the company continues to expand into international markets. During its Q2 earnings call, management noted that the construction of the company’s 286k square foot purpose-built indoor production facility located in Ontario remains on track. The facility, which will be the largest purpose-built indoor cannabis facility in the world, is currently preparing for planting. Separately, in July, Cronos announced a strategic joint venture to construct an 850k square foot greenhouse for cannabis production. Once fully operational, the facility is expected to produce up to 70k kilograms of cannabis annually. Additionally, the company’s Australian business was granted a license to manufacture medicinal cannabis, bringing it closer towards full-scale operations in the country.

Why The Stock Rallied Recently

The broader market for marijuana stocks saw a significant rally on Wednesday after beer maker Constellation Brands announced that it would boost its stake in Canopy Growth with a $4 billion investment, marking the single largest investment in the cannabis space. The deal has boosted sentiment around other marijuana stocks, such as Cronos, as the market likely expects that other food and beverage companies could seek out similar deals with cannabis producers. Moreover, there is a possibility that Constellation itself could acquire other rivals in order to boost its capacity using its sizable cash holdings. Cronos group saw its stock rise by about 12% to about CAD 8.40 in Wednesday’s trading.

 

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