Cronos Earnings: Decline in Gross Margin Overshadows Expense Reduction; Shares Fairly Valued

No-moat Cronos reported disappointing fourth-quarter results, with net revenue of $24 million, 4% lower sequentially. Moreover, gross margin more than halved from the third quarter to 8% due to disruptions from the Israel-Hamas war; continued oversupply in Canada pressuring prices; and unfavorable mix shift. After revisiting our assumptions, we've lowered our top-line forecast to 6% per year over the next decade, down from 8%, as we see increased competition not only in Cronos' Canadian home market but also its export markets. Additionally, we've reduced our long-term gross assumption to the high-20% range from the high-30% range. Partially offsetting these changes, Cronos has made good progress on its operating expense savings programs. We've cut our fair value estimates to $2 and CAD 2.80 per share, down from $2.50 and CAD 3.50. Shares are fairly valued, and we think US multistate operators Curaleaf and Green Thumb offer more attractive upside.