Cronos Earnings: Management Pulls Guidance as Revenue Decline Continues; Cutting Fair Values

No-moat Cronos CRON reported disappointing second-quarter results, with year-to-date net revenue trending well below both management’s full-year guidance of $100 million-$110 million and our previous $102 million full-year forecast. With the target looking out of reach, management retracted full-year guidance, and we’ve cut our 2023 revenue forecast to $81 million. Partially offsetting a smaller top line, we’ve reduced our forecast for full-year overhead expenses by roughly $12 million to $80 million, as cost-cutting efforts have progressed better than we expected. The net effect is that we have lowered our fair value estimate to $2.50 and CAD 3.50 per share, down from $3 and CAD 4, respectively. Shares look undervalued, but we see better risk-adjusted upside in cannabis among U.S. multistate operators.

With the previous announcement of the exit of the U.S. CBD business, Cronos has become even more concentrated toward Canadian and Israeli THC sales. The Canadian market remains crowded with competition and Israel has faced political unrest, leading to 6% and 25% year-on-year revenue declines, respectively. The growth runway looks more gradual than we previously expected, which pushes off breakeven profitability even further. We don’t expect Cronos to reach breakeven adjusted EBITDA until roughly the end of the decade, as the company’s small size limits its ability to scale across its overhead expenses.

One positive aspect of an investment in Cronos is that the threat of dilution to existing shareholders remains relatively low. Unlike Canopy’s aggressive acquisition of U.S. assets that used much of the Constellation investment, Cronos has kept most of its cash from Altria’s investment. As such, it has not needed to issue equity to fund losses, with the share count roughly flat over the past year, a rarity among Canadian licensed cannabis producers.