Cronos Group stock: Grossly overvalued as bottoming signs emerge

Cronos Group (NASDAQ: CRON) stock price has underperformed the market as the outlook of the cannabis industry worsens. The shares bottomed at $1.69 this year, which was over 93% below the highest level on record. Its market cap has retreated to about $712 million, lower than its all-time high of over $6 billion.

Grossly overvalued

Cronos is a Canadian cannabis company that is researching and building brands in the industry. Its products include Spinach, Peace Naturals, and Lord Jones. Its primary operations are in the United States and Canada. 

Cronos, like other cannabis stocks, has been in trouble in the past few months as growth in the industry slowed. There are also concerns about regulations in the sector. In the United States, bills to legalize marijuana countrywide have all failed. 

There are also signs that Cronos is grossly overvalued. Its total revenue jumped from $23.8 million in 2019 to over $91.9 million in  2022. Its revenue in the past four quarters came in at $87 million.

At the same time, the company’s losses have been enormous. After making a profit of over $1.16 billion in 2019, the company made a $155.3 million loss in the past four quarters. Therefore, a company with these numbers should not have a premium valuation.

The company has a market cap of over $700 million, which is enormous since analysts don’t expect it to have exponential growth in the coming years. Data compiled by SeekingAlpha shows that analysts expect that it will generate losses in the next three years.

They also believe that its annual revenue will cross $204 million in 2027. As such, it is hard to justify this hefty valuation even though the shares are 93% below their all-time high.

There is more. The company’s balance sheet is deteriorating. Its most recent results showed that the company had over $836 million in cash and short-term investments down from $877 million in December. It had over $1.5 billion in 2019. Therefore, there is a likelihood that the cash hoard will continue slipping in the next few quarters.

Cronos Group stock price forecast

CRON chart by TradingView

The daily chart shows that the CRON stock price has been in a bearish trend in the past few months. Most recently, the shares have found a strong support at $1.69, where it has failed to move below several times since May. The stock has also moved slightly above the 25-day and 50-day moving averages. It remains below the descending trendline shown in green.

Therefore, my view is that the stock could continue slipping in the next few months. However, since there are bottoming signs, there is a likelihood that a short squeeze will happen soon. That squeeze will see the shares move above $2.