What happened

Shares of GrowGeneration (NASDAQ:GRWG) were skyrocketing last month on a blowout earnings report from the operator of hydroponic and organic gardening stores. The news sparked a rally that sent the stock up more than 150% at one point in August. The stock pulled back after a short-seller attack to close the month up 89%, according to data from S&P Global Market Intelligence.

The chart below shows the stock's sharp rise and pullback.

GRWG Chart

GRWG data by YCharts

So what

As a seller of hydroponic growing equipment, GrowGeneration is seen as a pick-and-shovel play on the cannabis market. The stock surged 43% beginning on Aug. 13 after the company's earnings announcement showed booming sales in the second quarter.

A marijuana greenhouse.

Image source: Getty Images.

Revenue jumped 123% year over year to $43.5 million, easily beating the analyst consensus at $36.6 million. Same-store sales jumped 49%, and income from store operations rose 146% to $7.6 million. The company reported a generally accepted accounting principles (GAAP) per-share profit of $0.06 -- double from $0.03 in Q2 2019, and ahead of estimates by a penny. That makes GrowGeneration the rare company with triple-digit revenue growth that is also profitable.  

Guidance also delighted investors, as the company increased its full-year 2020 revenue guidance to $170 million-$175 million and projected 2021 revenue of $245 million-$260 million, both calling for adjusted EBITDA margins of roughly 10%. 

The stock pulled back, however, after Hindenburg Research issued a short-seller report claiming that the company was a roll-up of mom-and-pop gardening shops and was getting a temporary COVID-19 tailwind. It also accused co-founder Michael Salaman of past unscrupulous dealings.

GrowGeneration responded by accusing Hindenburg of making false statements designed to manipulate the stock. The company also said it would work with law enforcement to investigate and prosecute any criminal activity.

Now what

Hindenburg is correct that GrowGeneration has expanded mostly through acquisitions, meaning investors shouldn't expect the company to deliver triple-digit organic revenue growth. While its 49% same-sales growth rate is clearly impressive, that may be assisted by increased gardening interest during the pandemic -- though same-store sales were strong before the pandemic, too.

The stock has more than tripled this year, meaning shares are pricey. But with its rapid growth and profitability, GrowGeneration deserves some attention, especially from investors looking for a unique opportunity in the cannabis sector.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.