Mike Gorenstein, marijuana firm Cronos Group's founder and CEO, speaks during an interview in New York, U.S., September 4, 2018. REUTERS/Brendan McDermid

Cronos Group Inc. (CRON.TO) shares have nearly doubled since the announcement of a $2.4 billion equity investment by tobacco giant Altria Group Inc. (MO) in December. Now, mounting losses in the first full quarter of recreational sales have analysts questioning the company’s $4.4 billion valuation.

Before the opening bell on Tuesday, Cronos reported a net loss of $11.6 million during the three month period ended Dec. 31, compared to a profit of $2.1 million one year earlier. Revenue more than tripled, but operating expenses ballooned more than 300 per cent year-over-year.

Like many of its cannabis peers, management outlined challenges related to Canada’s new recreational market, with chief executive officer Mike Gorenstein noting a “pretty big shortage situation.”

But unlike its chief rivals, the Toronto-based producer did not disclose how much pot it sold in the adult-use category since legalization on Oct. 17.

Canaccord Genuity analyst Matt Bottomley downgraded Cronos shares to “sell” from “hold” following Tuesday’s financial results, while maintaining his $17 price target.

“We are lowering our recommendation to sell primarily on valuation,” he wrote in a note to clients. “We believe CRON’s valuation was somewhat stretched at Altria’s investment price of $16.25.”

Toronto-listed Cronos shares fell 10.31 per cent to $24.27 at 12:48 p.m. ET on Wednesday.

Bottomley said the stock trades at a “significant premium” to leading-edge cannabis players, noting the company’s recreational sales fell well behind its large-cap peers in its first full quarter of legalized sales in Canada.

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GMP Securities analyst Martin Landry maintained his “hold” rating on Cronos on Wednesday, trimming a dollar off his previous $24 target price.

He points to a weaker-than-expected average selling price per gram equivalent of $5.39 as the main driver of the top-line end EBITDA miss.

“We are left wondering why investors hang on,” he wrote in a research note on Wednesday. “In our view, investors expect CRON to enter into the U.S. market for hemp-derived CBD products . . . However, one can make a strong case that such a scenario appears already priced into the stock given Cronos’ valuation at 35x 2020 sales, 3x higher than peers.”

Landry lowered his revenue estimates for the first and second quarter of 2019, citing inventory constraints that could challenge the company’s ability to boost sales. Cronos reported $10.6 million worth of inventory as of Dec. 31, 2018, versus $14.2 as of Sept. 30, 2019.

“Only $1.6 million of the company’s inventories at year end was finished and ready to ship, indicating that packaging and processing is Cronos’ current bottleneck,” he wrote. “Management indicated during the call that improvements were needed in downstream packaging operations to support the company’s expected growth.”

Both analysts agree that Cronos has a valuable partner in Altria. The company said it will look to the maker of Virginia-based maker of Marlboro cigarettes for talent, research and development, and expertise in pre-rolled products.

Landry said Altria could also help alleviate the current automation bottleneck at Cronos, provide access to sizeable U.S. distribution, and help the company forge new partnerships.

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