Is Cronos Group Stock Too Expensive to Buy?
- What is the best-performing marijuana stock of all time?
- What is the best-performing stock among major Canadian marijuana producers so far in 2019?
But the old saying that success breeds contempt appears to be at play for Cronos. Several analysts have downgraded the stock. And Cronos Group’s share price has been in a holding pattern for several weeks. After its meteoric rise, is Cronos now simply too expensive to buy.
The lowdown on the downgrades and downbeat assessments
Probably the most damning of the analyst downgrades for Cronos Group came from BMO Capital Markets. Last week, BMO analyst Tamy Chen downgraded Cronos from a market-perform rating to an underperform. Her primary concern was valuation. Chen wrote to clients that Cronos traded at 85 times her estimated EBITDA — well above its peers.
Only a few weeks earlier, GMP Securities downgraded Cronos from buy to hold, causing the marijuana stock to sink. GMP Securities analyst Martin Landry wrote to clients that “shares needed a breather” after Cronos Group’s strong gains.
A couple of other analysts initiated coverage on Cronos Group recently with lackluster enthusiasm. On Feb. 25, Jefferies initiated coverage of Cronos with an underperform rating. Jefferies’ Owen Bennett noted that “the market has gotten ahead of itself” on the stock.
On March 5, Cowen and Company initiated coverage on Cronos with a market-perform rating, reflecting a neutral stance on the stock. Cowen analyst Vivien Azer said that her firm would “look for a more attractive entry point” before considering buying Cronos.
It seems as though nobody likes Cronos Group very much at its current price. But is Cronos Group really all that expensive compared to other marijuana producers?
We can’t use earnings multiples for Cronos nor for most other marijuana stocks, because they’re not consistently profitable yet. We can, however, compare the price-to-sales (P/S) ratios for the stocks. And Cronos is definitely a lot more expensive, with a P/S ratio of 404 versus multiples of 97, 84, and 214, respectively, for Canopy Growth, Aurora Cannabis, and Tilray.
Note, though, that all of these P/S ratios are based on historical sales. However, with the fast-changing landscape in global marijuana markets, historical sales levels are pretty much meaningless for Cronos and its peers.
We could take the approach that BMO analyst Tamy Chen used and look at…
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