The Newest Tailwind for the 'Home Depot' of Cannabis Companies
The unstoppable "green wave" continues across the U.S...
When we last highlighted U.S. cannabis legalization in January, 36 states and Washington, D.C. had legalized medical marijuana. And 15 states plus Washington, D.C. had legalized marijuana for adult recreational use.
On Election Day, voters in several more states took steps toward legalizing both recreational and medicinal cannabis use. And now, one of the U.S.' most populous states is joining in...
Late last month, New York state lawmakers reached an agreement to legalize recreational cannabis. The deal would legalize recreational marijuana for those age 21 and older. Governor Andrew Cuomo signed the bill into law days later.
This is going to be a huge new market for cannabis...
According to the New York Medical Cannabis Industry Association, the state's regulated cannabis market could reach $1.2 billion in 2023, growing to as much as $4.2 billion by 2027.
This just further legitimizes the cannabis industry. More states are going to follow suit. And that's a tailwind for today's company...
GrowGeneration's (Nasdaq: GRWG) goal is to build, buy, and manage warehouse-like stores across the legal cannabis landscape.
Established in Pueblo, Colorado in 2014 with its first store, Pueblo Hydroponics & Organics, the company has grown into a network of 39 stores with operations in all legal, adult-use states.
GrowGeneration's growing footprint of brick-and-mortar stores is backstopped with a robust online presence. Together, it has secured a nationwide supply chain expertise for any cannabis business. It's the largest of its kind in the U.S. dedicated to the legal cannabis industry.
The company provides the building blocks for other cannabis companies to grow their businesses. Up until now, those items came from many sources... from local nurseries and hydroponic supply stores to local pipe and tobacco shops.
But now, they can get all their supplies from GrowGeneration. The company strives to be the "Home Depot" of the emerging cannabis industry... It's consolidating the industry's fragmented retail suppliers... and it's doing so without ever touching the plant. So it won't face the same operating restrictions as a company that's directly handling cannabis.
For example, unlike at direct-cannabis retail stores, customers can use credit cards at any GrowGeneration location... And the company has full access to the commercial banking and capital markets in the U.S.
Additionally, GrowGeneration can sell its products across state lines. Cannabis grown in Maryland can only be legally sold in Maryland. But this isn't a market limitation for GrowGeneration...
In 2017, GrowGeneration established a toehold across a handful of markets. By 2018, it had a strong foothold firmly in place, and by the year's end it had 12 stores open and operating. This baseline created $29 million in revenue, or 101% more than in 2017.
Then in 2019, the company grew revenue to $80 million. This comfortably exceeded management's guidance of $75 million. Last year, revenue continued to grow, with GrowGeneration posting sales of $193 million. The rapid growth should continue. Wall Street is expecting GrowGeneration's sales to more than double to $413 million in 2021. And the company thinks it could do even better than that... recently guiding full-year revenue of $415 million to $430 million.
Revenue is diversified and falls into these six product-mix categories:
- Nutrients and additives
- Medium and containers
- Plant production and harvest
- Lighting
- Climate control
- Hydroponic systems
GrowGeneration has a healthy revenue distribution by product. While nutrients and additives account for almost one-third of total sales, these are "consumable" products. Customers purchase and use them, and then they need to be replenished.
As long as GrowGeneration can remain competitive, it's a good thing that one-third of its revenue comes from consumables that need to be repurchased.
Unlike many cannabis companies, GrowGeneration didn't go public in Canada. It followed the normal, well-vetted initial public offering ("IPO") process in the U.S., and is currently listed on the Nasdaq. The company is subject to strict reporting and compliance requirements. This removes a number of hurdles for investors, especially institutional investors.
And GrowGeneration's shares have soared as the legalization trend takes shape. The stock is up around 1,400% over the past year, right now trading 22% below its February all-time high.
Given GrowGeneration's mission-critical supply business and the rapid legalization across the U.S., its strong sales growth should continue. And that could serve as a further tailwind for GrowGeneration shares.
Sometimes, investing is simple.