Cronos Group Inc. (NASDAQ:CRON) is skyrocketing up the charts having emerged it is an acquisition target of Marlboro cigarette-maker Altria Group Inc. NYSE: MO. The takeover bid comes weeks after the Canadian cannabis company reported mixed financial results, depicted by widening net loss and robust revenue growth.
Cronos Group Price Analysis
After plunging in the wake of the disappointing financial results, the stock has bottomed out in the recent trading session. The acquisition chatter has all but accelerated the upward momentum. The stock appears to have hit a solid support level at the $7 a share level, from where it is trying to make a comeback back to the top.
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After taking out the $10 a share level, the stock looks set or make a run for 52-week highs of $19 especially on the takeover news. Any sell-off now would experience strong support at the $6 a share level. A breach of the critical support level could see the stock edging lower, in continuation of the emerging uptrend.
Altria- Cronos Group merger
While no deal has been reached so far, Cronos has confirmed that it is in discussions with Altria in what it says could lead to potential investment. It does not come as a surprise that Cronos is an acquisition target.
Altria has had to rethink its long-term plan in the wake of increased campaigns discouraging people from engaging in cigarette smoking. Cigarette sales have taken a significant hit in recent years due to the older smoking generation dying.
Legalization of cannabis for recreational use appears to have presented a window of opportunity. Cannabis and e-cigarettes have presented a massive opportunity in part because the young generation are opting for vaping given the medical benefits that marijuana comes with.
Robust Revenue Growth
Cronos is seen as an idea pick that will give the cigarette maker a head start in the burgeoning cannabis marketplace. The company is fresh from reporting a 186% increase in revenues that came in at $3.8 million, further attesting to strong demand for its cannabis products in the market.
The robust revenue growth does not reflect the effect of recreational use legalization as the same law came into effect on October 17. Q4 revenue, on the other hand, could receive a boost as a result of the widened target market.
“We are encouraged with our third quarter results, which reflect the meaningful progress we are making on our strategic initiatives,” said CEO, Mike Gorenstein.
However, a wider than expected net loss of 44 cents a share versus a 1-cent profit a year is a point of concern for investors. The wider than expected net loss came on the company investing a great deal on marketing efforts. Marketing and sale expense in the quarter was up 240%.
The net loss triggered a sell-off of the stock. In response to the wider than expected net loss, the management insisted they made landmark partnerships all in the effort of expanding the company’s reach beyond the flower and Canada.
In addition, the company has reiterated its pursuit of opportunities in the recreational cannabis marketplace. Cronos has already launched a mainstream recreational brand dubbed spinach.
The company has also completed the construction of a 286,000 sq. Ft. purpose-built indoor production facility. Cannabis cultivation in the facility has already commenced on the company-receiving license mid this year.
While the Altria takeover talk has had a positive impact on the stock, Cronos Group remains well positioned to succeed on its own. The cannabis company has shown it has what it takes to compete against the big boys, in pursuit of market share in the burgeoning cannabis sector. Robust revenue growth all but affirm the company’s growth potential.
Recreational use legalization in Canada, has on the other hand, triggered a high demand for cannabis products that continues to outstrip supply. Cronos Group being one of the early movers and established players remains well positioned to take advantage of the new market opportunity.
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