Every day, Wall Street analysts upgrade some stocks, downgrade others, and “initiate coverage” on a few more. But do these analysts even know what they’re talking about? Today, we’re taking one high-profile Wall Street pick and putting it under the microscope…
Canadian cannabis stock Cronos Group (NASDAQ:CRON) has had a fabulous year, surging more than 100% in value as Canada’s legal marijuana rollout proceeds and hopes for similar legalization in the U.S. gain momentum. As of today, Cronos boasts the third-largest market capitalization among Canadian pot stocks — and one banker thinks it could do even better than that.
Early this morning, analysts at Merrill Lynch announced they are reversing their opinion on Cronos, and upgrading the shares all the way from underperform to buy, with a new price target of $20. Is this a good idea, though?
Let’s find out….
Reasons not to like Cronos today
As my fellow Fool.com contributor George Budwell has pointed out, “On paper, Cronos looks like a stock to avoid right now. The company’s quarterly sales have paled in comparison to those of Aurora and Canopy in the first two quarters since Canada legalized adult-use recreational marijuana and management doesn’t even seem interested in catching up to these top dogs from a production standpoint.”
Over the last 12 months, Cronos made a paltry $14.4 million in sales — almost entirely limited to within Canada. (According to data from S&P Global Market Intelligence, 93% of the company’s revenue comes from Canadian sales.) Its operations earn no profits, and Cronos is burning cash at the rate of $100 million a year.
Despite all this, Cronos carries a market cap of $5.35 billion and a valuation of more than 370 times sales, let alone earnings.
Reasons to love Cronos tomorrow
Merrill Lynch deadpans in a note covered on StreetInsider.com (subscription required) that this looks like “a high multiple.” Even assuming a ramp in production and sales, and giving Cronos credit for the large amount of cash on its balance sheet, Merrill is forced to admit shares sell for a sky-high enterprise valuation of 62 times 2020 sales. Regardless, the banker is telling investors to buy Cronos today despite that high price.
Not to put too fine a point on it, but…
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