Shares of Canadian-based cannabis producer Cronos Group (TSX:CRON), (NASDAQ:CRON) popped at the end of last week, jumping almost 8.5% last Friday on news it had secured a deal to buy four subsidiaries of Redwood Holding Group for US$300 million (C$395.96). This sets the stage for the next possible move in the company’s share price – its third quarter earnings report due on Thursday, Aug. 8.
The acquisition by Cronos of the Los Angeles-based Redwood, which markets and distributes CBD-infused products under the Lord Jones brand, is a key strategic play that focuses the Toronto-based cannabis producer squarely in the CBD market. Lord Jones markets hemp-derived CBD-based products that include skin creams, bath items and gum-drops throughout the United States. CBD, or cannabidiol, is a derivative extracted from the cannabis plant that is touted for its therapeutic qualities and believed to help relieve everything from arthritis to migraines and anxiety. It does not produce a high.
First Push Into U.S. CBD Market
The CBD market in the U.S. has expanded rapidly this year since the federal government approved the federal farm bill in December 2018 that legalized the growing of hemp. Although hemp and marijuana are both members of the cannabis family, hemp has barely any THC, which is the psychoactive ingredient that produces a high. Hemp also has a higher CBD content and is a heartier plant, making it better suited to be grown outdoors.
The Redwood cash-and-stock deal is in line with Cronos Group’s plan to become a dominant player in the global CBD market. Its first push into the U.S. market came earlier this year when it landed a US$1.8-billion deal with cigarette maker Altria Group (NYSE:MO) Inc. Estimates have pegged the U.S. CBD market to be worth between US$20 billion and US$24 billion within the next five years.
On Monday, Cronos shares on the Nasdaq were down 3%. Markets in Canada were closed for a civic holiday. The Toronto-based company is the third largest marijuana company in Canada with a market cap of US$4.63 billion (C$6.12 billion). It has been one of the best performing stocks in the sector, gaining about 136% from this time last year.
Investors in the sector who have very little to celebrate in the last few months will be watching Cronos’s earnings report later this week to see if can keep the momentum moving in a positive direction.
Aphria Hits Profitability
The topic of earnings in the cannabis sector easily triggers a conversation about the timeline toward profitability. Of course, in this ever-expanding emerging industry that conversation often sounds like a debate with the central question being: When will profitability be realized? That debate was heightened last week when Aphria (TSX:APHA), (NYSE:APHA) released its fourth quarter report that boasted an unexpected profit and an eye-popping 969% spike in year-over-year revenues.
The Canadian cannabis grower reported a profit of US$11.94 million (C$15.76 million) for the quarter that ended May 31. Revenues for the period hit US$97.41 million (C$128.57 million), a 75% increase over the previous quarter and 969% compared with the same period in the previous year. All headline figures, including the amount of cannabis sold, were more than analysts were expecting. The net revenue figures included more than 3,225 kilograms of cannabis sold to for recreational use and 1,417 kilograms of medical marijuana.
Shares of Aphria soared at the end of last week, catapulting more than 42% on the Nasdaq in New York and just over 40% on the S&P/TSX Composite to close at US$7.32 (C$9.67.) They slipped on Monday, ending the day down almost 4.4% in New York at US$7.01.
The Aphria results could very well set the standard investors in the sector will be looking for from the other players in the space, adding to the pressure for companies to shorten their timeline to profitability.