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Canopy Growth vs. Cronos: Which Stock is a Better Buy?

A Biden presidency has led to increased bullishness regarding the cannabis sector. Many states also approved initiatives that will decriminalize or legalize cannabis for recreational or medicinal purposes. As Canopy Growth (CGC) and Cronos Group (CRON) battle for market dominance post-election results, which stock is better positioned to emerge as the industry leader? Read more to find out.

The cannabis industry is grabbing investors’ attention following the election. The President-elect Joe Biden will bring a much more relaxed attitude towards enforcement of marijuana laws which bodes well for Canopy Growth Corporation (CGC) and Cronos Group Inc. (CRON). Vice president-elect Kamala Harris has sponsored the MORE act, decriminalizing the use of marijuana and expunging convicted felons on these grounds.

Marijuana Business Daily estimates that marijuana businesses operating in the United States could generate $130 billion annually by 2024. While both CGC and CRON are leading players in the Canadian market, where cannabis is legal, both are looking to expand in the US. CGC hit its 52-week high of $26.95 on November 9th, following the election results declaration.

Both stocks have generated decent returns over the past three years. While CRON gained 155.9% over this period, CGC returned 50.7%. In terms of six-month performance, however, CGC is the clear winner with 61.2% gains versus CRON’s 33.4%.

But which stock is a better buy now? Let’s find out.

Latest Developments

CGC partnered with Martha Stewart to release a 15-flavor CBD Wellness Gummies Holiday Sampler. Ahead of the holiday season, this confection platter is expected to witness a surge in demand as people go gift shopping.

Earlier this year, CGC bought a majority stake in Acreage Holdings, for an upfront cash payment of $37.50 million. Upon a successful merger, Acreage has developed a marketable plan to promote CGC’s beverage brand. In this regard, the company is currently planning to launch CGC Select THC beverages in summer 2021. On November 5th, CGC launched Quatreau, a premium CBD induced beverage line.

On November 4th, CGC announced shifting its U.S. stock exchange listing from NYSE to NASDAQ. This move is expected to reduce the overall cost while allowing the company greater access to a range of services and tools stimulating the company’s technical innovation, as stated by CEO David Klein.

On the other hand, CRON’s impressive performance over the past couple of months led to recognition from the TSX30 program. On September 15th, CRIN was recognized as the third-best performing company in the Toronto Stock Exchange’s TSX30 list, based on its dividend-adjusted share price appreciation.

On October 5th, the company announced the availability of its leading medical brand Peace Naturals in Israel. It also ventured into CBD skincare products and launched Happy Dance skincare products in collaboration with Kirsten Bell on October 14th.

Recent Financial Statements

CGC’s net revenues increased 77% year-over-year to $135.30 million in the fiscal second quarter ended September 2020. This was primarily driven by a 178% increase in Canadian recreational net revenue and a 74% rise in Cannabis net revenue.

In the third quarter ended September 2020, CRON’s consolidated net revenue increased 96% year-over-year to $11.36 million, which can be attributed to a 143% rise in sales in the United States. Gross margin increased 40 basis points from the same period last year.

Past and Expected Financial Results

CGC’s revenue and total assets increased at a CAGR of 102.1% and 101.9% respectively, over the past three years. Conversely, CRON’s revenues and total assets rose at CAGRs of 141.3% and 261.3% respectively, over the same period. CGC’s EPS grew 62.9% year-over-year, while CRON’s EPS increased 316.7% over this period.

Analysts expect CGC’s EPS to rise 41.6% year-over-year for the fiscal period ending March 2021, and 16.8% for the fiscal period ending March 2022. Revenue is expected to grow by 34.6% in 2021, and 38.4% in 2022.

CRON’s EPS is expected to increase 1,198.2% year-over-year for the year ended December 2021. The consensus revenue estimates indicate a 79.2% improvement for the year ending December 2020, and a 115.6% increase next year.

Profitability

CGC’s trailing 12-month revenue is 11.41 times what CRON generates. CGC is also more profitable with a gross margin of 24.2% compared to CRON’s negative values.

However, CRON’s ROE of 18.8% compares favorably with CGC’s negative value.

Valuation

In terms of trailing 12-month Price/ Sales, CRON is currently trading at 71.67x, 201.4% more expensive than CGC, which is currently trading at 23.78x. CRON is also more expensive in terms of trailing 12-month EV/ Sales (36.63x versus 22.91x).

However, CGC’s trailing 12-month price to book ratio of 2.39x is 64.8% higher than CRON’s 1.45x.

POWR Ratings

CGC is rated “Buy” in our proprietary POWR Ratings system, while CRON is rated “Neutral”. Here’s how the four components of overall POWR Rating are graded for both these stocks:

CGC has an “A” for Trade Grade and Peer Grade, and “B” for Buy & Hold Grade and Industry Rank. In the 240-stock Medical Pharmaceuticals industry, it is currently ranked #26.

CRON has a “B” for Peer Grade and Industry Rank, and “C” for Trade Grade and Buy & Hold Grade. It is currently ranked #11 out of 28 stocks in the Agriculture group.

The Winner

A Biden win opens a new window of opportunities for both CGC and CRON, allowing them to gain access to the largest economy in the world. However, CGC remains a better buy here, despite CRON’s higher earnings potential, as the former has an established supply channel across the world and a huge clientele base. Also, through CRON’s last reported results indicate an impressive year-over-year rise in revenues, the company is reported a net loss from operations. Moreover, CRON is trading below its 30-day exponential moving average of $7.39, reflecting short term bearishness, while CGC is trading above its 30-day exponential moving average of $22.20, indicating an uptrend in the stock. Thus, CGC is a better buy here.

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CGC shares were trading at $24.43 per share on Friday afternoon, up $0.62 (+2.60%). Year-to-date, CGC has gained 15.84%, versus a 12.26% rise in the benchmark S&P 500 index during the same period.



About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.

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