Thank you very much for this article. I think there's a great tradable opportunity for cannabis stocks in an election year - am slowly dipping my toes into the cannabis space too.
However, want to get your views on how does Cronos compare with OrganiGram?
Additionally, should Rescheduling not be successful, would this break your thesis? I suppose our money will be dead money for even longer?
I like Organigram a lot and I have a position there as well. Ultimately, I think CRON and OGI are the best ways to play the overarching theme I've tried to communicate in the write-up. I prefer Cronos due to its balance sheet, which provides more downside protection and optionality, but OGI is probably a superior business.
The failure of Rescheduling would not be a thesis breaker at all. The company is still not adequately priced for the domestic Canadian opportunity, let alone rescheduling. Even without the US opportunity, I still think Cronos could be a multi-bagger simply from further industry consolidation and regulatory improvement in Canada. Interestingly, the longer the US delays rescheduling, the better the opportunity in the US becomes for Cronos. Why? Because Cronos will have even more time to improve its offering, brand development, efficiency etc. while the MSOs continue to be stifled in their ability to compete. In many ways, the situation rhymes with that of brewers during Prohibition. During that period, the companies most inhibited by the restrictions died, while those that were able to survive went on to be the dominant forces in the industry for a century and counting (due to the competitive advantages they acquired while surviving Prohibition.) I wrote some thoughts here: https://x.com/ragingbullcap/status/1768734449661853868?s=20
Hi Dheeraj, thanks for the question. I am planning to do a Part II of this idea, which will highlight in more detail how I see the US opportunity, and why I think Cronos and some of the other large Canadian producers might be the way to play it. But here is my general thinking on why CRON over something like Grown Rogue
1. Cron is just way cheaper presently. One could argue that discount is deserved, but I disagree.
2. Cron has way less sensitivity to Rescheduling. While I am optimistic we see rescheduling soon, its definitely not an inevitability. We saw many of the US based companies trade down on last week's WSJ article (which I reference in the writeup), but Cron shares were unaffected. Ultimately, the market doesn't seem to be giving any value to Cron for the US opportunity, which really silly imo.
3. And that brings me to the next point. With respect to the US opportunity, ultimately I think the cannabis industry will come to be dominated by branded specialty products (e.g. edibles, vapes) as opposed to flower. The large Canadian players are best positioned to make this happen, due to a large head start on R&D and branding, more efficient and focused operations, and the cheap capital and distribution networks provided by iBg Tobacco. It sounds silly, perhaps, but I see the opportunity with CRON and certain of its competitors (mainly OGI) as being akin to owning the large brewers at the end of Prohibition. I have been part of a lengthy thread on twitter discussing this in more detail here: https://x.com/ragingbullcap/status/1767946011844964588?s=20. This point is what I intend to dive into on the next write up.
Look, I think small of the small niche growers like Grown Rogue are quite attractive and likely to do quite well. But they are ultimately less asymmetric bets in my opinion (less upside, more downside) and have far more regulatory risk than CRON, which has far more shots on goal - it isn't even being value properly for the Canadian opportunity right in front of it, let alone the US or international opportunities.
Thanks for the question Oscar. You are correct that they are taking large losses on the income statement, but follow the cash. On an CFFO basis, the company lost -42.8m last year, but 33m of that was attributable to a one-off tax-obligation. Some of the opex is also attributable to non-cash impairments.
The main reason the company is able to breakeven is due to the enormous interest it earns on its cash balance (~50m) in addition to in flows from some of its other investments. The company is guiding to cash flow positive for FY 2024 and expects net cash to actually increase during the year, due to interest income as well as another 10m or so improvement in Opex.
(Would encourage you to read the most recent earnings transcript). In fact, the company barely burned cash in FY 2023 (much of that ~100m loss you see on the cash flow statement is offset by an increase in short-term investments, which is effectively cash - the company's cash + short-term investment balance only fell $17m over the entire year).
Moving forward, I would encourage you to consider a couple points here. 1) The topline is growing at a decent clip and that should accelerate as the industry continues rationalizing and pricing continues to trend up; this will have outsized growth due to operating leverage and further opex improvements (+10m for 2024); 2) Reformation of the excise tax to a 10% ad valorem would immediately improve gross margins by about $20m assuming flat sales (in my view, this is inevitably coming at some point in the near future); and 3) Yes, the ability to breakeven is tied to interest income and not the operating business - but remember, none of the other players in the space have the luxury of breaking even, which means Cronos is positioned to survive for as long as it takes for consolidation and regulatory improvements to improve.
In short, you have a clear path to a positive PnL and the company won't be burning any money while it waits.
Regarding Germany, its not as easy with the legalization as you described. In April cannabis should be legalized; but commercial sale is not (yet). It will probably take another year or so until this is really through and the government is done "testing"
Thank you for the kind words and thanks for the insight into Germany. The German opportunity is definitely in its infancy and is not a needle mover for Cronos (yet), but it does illustrate one of the many shots on goal the company has that are presently being given zero value.
Thank you very much for this article. I think there's a great tradable opportunity for cannabis stocks in an election year - am slowly dipping my toes into the cannabis space too.
However, want to get your views on how does Cronos compare with OrganiGram?
Additionally, should Rescheduling not be successful, would this break your thesis? I suppose our money will be dead money for even longer?
I like Organigram a lot and I have a position there as well. Ultimately, I think CRON and OGI are the best ways to play the overarching theme I've tried to communicate in the write-up. I prefer Cronos due to its balance sheet, which provides more downside protection and optionality, but OGI is probably a superior business.
The failure of Rescheduling would not be a thesis breaker at all. The company is still not adequately priced for the domestic Canadian opportunity, let alone rescheduling. Even without the US opportunity, I still think Cronos could be a multi-bagger simply from further industry consolidation and regulatory improvement in Canada. Interestingly, the longer the US delays rescheduling, the better the opportunity in the US becomes for Cronos. Why? Because Cronos will have even more time to improve its offering, brand development, efficiency etc. while the MSOs continue to be stifled in their ability to compete. In many ways, the situation rhymes with that of brewers during Prohibition. During that period, the companies most inhibited by the restrictions died, while those that were able to survive went on to be the dominant forces in the industry for a century and counting (due to the competitive advantages they acquired while surviving Prohibition.) I wrote some thoughts here: https://x.com/ragingbullcap/status/1768734449661853868?s=20
I've seen the Grown Rogue thesis elsewhere. What are your thoughts on why Cronos is a better investment than Grown Rogue?
Hi Dheeraj, thanks for the question. I am planning to do a Part II of this idea, which will highlight in more detail how I see the US opportunity, and why I think Cronos and some of the other large Canadian producers might be the way to play it. But here is my general thinking on why CRON over something like Grown Rogue
1. Cron is just way cheaper presently. One could argue that discount is deserved, but I disagree.
2. Cron has way less sensitivity to Rescheduling. While I am optimistic we see rescheduling soon, its definitely not an inevitability. We saw many of the US based companies trade down on last week's WSJ article (which I reference in the writeup), but Cron shares were unaffected. Ultimately, the market doesn't seem to be giving any value to Cron for the US opportunity, which really silly imo.
3. And that brings me to the next point. With respect to the US opportunity, ultimately I think the cannabis industry will come to be dominated by branded specialty products (e.g. edibles, vapes) as opposed to flower. The large Canadian players are best positioned to make this happen, due to a large head start on R&D and branding, more efficient and focused operations, and the cheap capital and distribution networks provided by iBg Tobacco. It sounds silly, perhaps, but I see the opportunity with CRON and certain of its competitors (mainly OGI) as being akin to owning the large brewers at the end of Prohibition. I have been part of a lengthy thread on twitter discussing this in more detail here: https://x.com/ragingbullcap/status/1767946011844964588?s=20. This point is what I intend to dive into on the next write up.
Look, I think small of the small niche growers like Grown Rogue are quite attractive and likely to do quite well. But they are ultimately less asymmetric bets in my opinion (less upside, more downside) and have far more regulatory risk than CRON, which has far more shots on goal - it isn't even being value properly for the Canadian opportunity right in front of it, let alone the US or international opportunities.
Looking forward to part 2! Thank you for the detailed response, I’ve opened a position on the basis of a negative EV, great work so far.
"Cronos has been growing the topline while aggressively cutting costs, and as a result, is now approximately breaking even."
How can you say that it is breaking even? It's burning a ton of cash... For 2023, gross profit was 12m while opex was 92m
Thanks for the question Oscar. You are correct that they are taking large losses on the income statement, but follow the cash. On an CFFO basis, the company lost -42.8m last year, but 33m of that was attributable to a one-off tax-obligation. Some of the opex is also attributable to non-cash impairments.
The main reason the company is able to breakeven is due to the enormous interest it earns on its cash balance (~50m) in addition to in flows from some of its other investments. The company is guiding to cash flow positive for FY 2024 and expects net cash to actually increase during the year, due to interest income as well as another 10m or so improvement in Opex.
(Would encourage you to read the most recent earnings transcript). In fact, the company barely burned cash in FY 2023 (much of that ~100m loss you see on the cash flow statement is offset by an increase in short-term investments, which is effectively cash - the company's cash + short-term investment balance only fell $17m over the entire year).
Moving forward, I would encourage you to consider a couple points here. 1) The topline is growing at a decent clip and that should accelerate as the industry continues rationalizing and pricing continues to trend up; this will have outsized growth due to operating leverage and further opex improvements (+10m for 2024); 2) Reformation of the excise tax to a 10% ad valorem would immediately improve gross margins by about $20m assuming flat sales (in my view, this is inevitably coming at some point in the near future); and 3) Yes, the ability to breakeven is tied to interest income and not the operating business - but remember, none of the other players in the space have the luxury of breaking even, which means Cronos is positioned to survive for as long as it takes for consolidation and regulatory improvements to improve.
In short, you have a clear path to a positive PnL and the company won't be burning any money while it waits.
Interesting,... Thank you very much for the explanation!
Thanks for the great article.
Regarding Germany, its not as easy with the legalization as you described. In April cannabis should be legalized; but commercial sale is not (yet). It will probably take another year or so until this is really through and the government is done "testing"
Thank you for the kind words and thanks for the insight into Germany. The German opportunity is definitely in its infancy and is not a needle mover for Cronos (yet), but it does illustrate one of the many shots on goal the company has that are presently being given zero value.