Are you looking for a stock of American cannabis? Maybe this is the one
Consumers and investors alike are excited about the emergence of the cannabis industry in the United States. Legalization is growing state by state and social acceptance is growing at the federal level. Specialized retailer GrowGeneration (NASDAQ: GRWG) is a potential stock for investors looking for broad exposure to US cannabis. Here are three reasons why GrowGeneration is well positioned to thrive in the years to come.
1. Cannabis laws are changing rapidly
In 2012, Colorado and Washington became the first states to legalize recreational cannabis. Since then, the momentum has accelerated in the United States. Recreational cannabis is now legal in 19 states and 36 have legalized it for medical purposes.
Cannabis tech company Flowhub estimates that the U.S. cannabis industry is currently worth $ 61 billion, and given that most users are from a young and emerging population, that number could certainly increase. About 65% of recreational users and 59% of medicinal users are Millennials or Gen Z.
Growing demand could lead more users to cultivate their own cannabis, which is permitted by the legalization laws of many states. Right now, it’s legal to grow cannabis in 18 states, so private and commercial cultivation may be on the rise.
2. GrowGeneration is developing in several ways
GrowGeneration is a specialty retailer, best viewed as a Home deposit for cannabis. The company operates a network of 53 stores (with more in the works) in 12 states. It sells all the equipment and supplies for the crop, including climate controls, lighting, soils, fertilizers and additives.
The company is experiencing strong same-store sales growth, up 51% in the first quarter of 2021 compared to the first quarter of 2020. Same-store sales measure the additional revenue generated by the company’s existing footprint. business, and when they increase, it is a good indicator that consumers are buying more frequently.
However, GrowGeneration is also aggressively increasing the number of its stores, both organically and through acquisitions. In July, the company announced an agreement to acquire HGS Hydro, a retailer of hydroponics products in Michigan (terms were not disclosed). The deal will add $ 50 million to GrowGeneration’s annual revenue and bring the company’s total number of stores to 65 at closing.
The company is targeting 100 company-wide stores by 2023, which could increase revenue significantly, especially given the strong same-store sales growth from GrowGeneration. Management expects revenue of $ 460 million for the year 2021, an increase of 138% year-over-year.
3. Strong finances will become stronger
Fast growing businesses often lose money because they invest a lot to fuel that growth, but GrowGeneration is already paying off. The company posted positive earnings before interest, taxes, depreciation, and amortization (EBITDA) of $ 19.2 million in 2020, and management expects that number to increase 202% in 2021 to 58 million. dollars, earnings growth is accelerating.
This is especially important because GrowGeneration uses acquisitions to help expand its store footprint – being profitable allows management to fund these moves directly instead of offering stocks to raise funds, thereby diluting investors. In the first quarter of 2021, the company spent $ 39 million on acquisitions, with a total of $ 92 million in cash and cash equivalents left on its balance sheet. Investors will want to keep an eye on the amount of cash in the company to see if a stock offering becomes necessary.
Here is the bottom line
GrowGeneration is not alone in the field of cannabis supplies. It faces competition from many smaller “mom and pop” stores and big box competitors such as Home Depot and Lowe’s also offer hydroponic gardening supplies. However, GrowGeneration’s focus as a specialty retailer could help it maintain its growth, and its product selection and expertise should be advantageous.
The stock currently has a market cap of just $ 2.5 billion and is trading at a price-to-sell ratio of 5.8 according to management’s forecast for 2021. Home Depot, a larger (and growing more competitive) competitor slow), is trading at a similar P / S of 2.4, so GrowGeneration looks well valued considering its stronger growth and smaller size.
Investors will need to keep an eye on the company’s expansion plans and how it executes them. A significant drop in growth could indicate that competitors are interfering in GrowGeneration’s business, but this does not appear to be the case yet. If same-store sales and number of stores continue to increase over the next several years, investors could see the share price rise at the same time.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.