Raymond James analyst Rahul Sarugaser remains confident about the Cronos Group (Cronos Group share price, chart, news, analysts, finances TSX: CRON) and maintains his rating of “Outperform 2” in an update for customers on Wednesday.
Cronos Group was founded in 2012 and is headquartered in Toronto. The Cronos Group is a licensed Canadian cannabis producer that aims to commercialize cannabis and cannabinoids in several international markets for adult use.
The latest update from Sarugaser comes after the release of Cronos launched its first THC + CBG gum under its SPINCHFEELZ brand through its partnership with Ginkgo Bioworks Holdings (Ginkgo Bioworks Stock Quote, Chart, News NYSE: DNA) and becomes the first edible product marketed in Canada containing cultured CBG.
“While we don’t cover individual launches of adult cannabis SKUs – we prefer to focus on companies’ net retail sales performance – as CRON has made a strong statement that it sees the Canadian market as a product testing ground, this launch is CRON’s Fermented Gummy Bear is a milestone not only in the Canadian context, but also in the US and global context, as CRON is trying to (possibly) expand marketing and sales, ”said Sarugaser.
The product presented as SPINACH FEELZ Chill Bliss 2: 1 THC | CBG gummies will have a pineapple star fruit flavor and is available in Alberta, British Columbia, Manitoba, Ontario and Saskatchewan in two packs with 10 mg THC and 5 mg CBG per pack , with the aim of creating a full line of cannabis products containing rare cannabinoids in a variety of product formats.
The partnership between Cronos and Ginkgo originally came about through an agreement signed in September 2018 that helped Cronos become a top organization in the cannabinoid innovation industry. Shortly thereafter, Altria received a $ 1.8 billion investment for Cronos that Sarugaser believed was partially backed by Ginkgo’s technology.
The deal has also proven fruitful for Ginkgo as the company achieved the target productivity levels of its first cultivated cannabinoid, CBGA, which triggered a payment of 1.5 million Cronos Group shares to Ginkgo valued at approximately $ 9.3 million.
“Today we’re celebrating an incredible achievement for Cronos Group and the cannabis industry at large with the launch of Canada’s first cannabis edible with cultured CBG. This new product is truly a breakthrough in cannabis innovation, ”said Kurt Schmidt, President and CEO of Cronos Group, in the company’s October 20 press release. “We are achieving our ultimate goal of introducing exceptional products that unlock the full potential of cannabis, and we look forward to bringing even more rare cannabinoids to market under the SPINACH FEELZ ™ sub-brand.”
Sarugaser pointed out what he sees as the competitive advantage of the Cronos Group in the cannabis product market, with Ginkgo’s technology helping the company manufacture certain molecules in limited quantities where the company’s domestic and American competitors continue to focus on herbal products (i.e.
“With fermentation-derived CBG products now on store shelves, the full power of Ginkgo’s cell development teams is being applied to CRON’s next target cannabinoids: CBC, CBD, THC, CBGV, CBCV, CBDV, THCV,” Sarugaser said. “Continuously improving CRON’s production processes at Cronos Fermentation in Winnipeg will continue to improve cannabinoid productivity over the manufacturing lifecycle of these products, with lessons learned from each cell program influencing the optimization of all others.”
Sarugaser predicts the company’s financial condition will improve over time, as he projects the company’s revenue to $ 67 million in 2021, a potential increase of 42.6 percent year over year. However, he expects that number to more than double in 2022, forecasting sales of $ 145 million.
Meanwhile, with continued investment and development, Sarugaser continues to forecast EBITDA losses for Cronos, with projected losses of $ 164 million in 2021 and $ 145 million in 2022.
Sarugaser’s valuation data shows similar trends, with the EV / Revenue multiplier expected to decrease from the reported 32.6x in 2020 to 22.9x in 2021 and 10.5x in 2022, while the EV / EBITDA multiples for both in 2021 (-9.3x) and 2022 (-10.5x).
Through its continued partnership with Ginkgo Bioworks Holdings, Sarugaser believes that the Cronos Group is positioned as a market maker for cannabis products in the future.
“With this first introduction of CBG-based products into the Canadian adult cannabis market, we are seeing market makers begin to introduce the first generation of smaller cannabinoid-based products,” said Sarugaser. “Next will be the pipeline of other ‘minors’ who we believe will represent the future of cannabis derivative products with CRON at the top, which bodes well for its dominance of future cannabis derivative markets.”
Overall, the Cronos Group’s share price fell 28.3 percent over the year and continued to decline throughout 2021 after hitting a high of $ 19.77 / share on February 10.