If you're looking to invest in the cannabis industry but don't want to worry about the risks of buying shares of pot producers, you may want to consider gardening and hydroponics company GrowGeneration (GRWG -6.05%).
Hydroponics is a way to grow plants without the use of soil, and GrowGeneration supplies cannabis producers with many necessities for growing both hydroponically and traditionally, including greenhouse materials and grow lights. The company has 28 organic garden centers across the country, and management thinks it's the largest chain of its kind in North America.
Since it's not selling marijuana, GrowGeneration doesn't need to worry about pot being illegal at the federal level. That makes it easy for the company to achieve economies of scale, because it can transport its products across state lines without worrying about legal problems. But let's look beyond just legality and see whether GrowGeneration is a business worth investing in based on its financials, growth prospects, and current valuation.
Sales growth has been exceptional, but profits remain minimal
In its second-quarter results, released Aug. 13 for the period ending June 30, GrowGeneration's sales hit a record of $43.5 million. It was the tenth quarter in a row of record revenue numbers. Sales were up 123% year over year, from just $19.5 million in the same period last year. What's even more impressive is that GrowGeneration's been outperforming its guidance and has upgraded its projections for the year. Management now anticipates between $170 million and $175 million in revenue for 2020. That's up from the guidance $135 million to $140 million it was calling for in the first quarter.
From a growth perspective, things look incredible for the company, but that should perhaps come at no surprise, given that cannabis sales are very strong this year amid the coronavirus pandemic. Multiple U.S. states have posted record marijuana sales numbers this year.
But investors may be less excited by what they find further down its income statement. In Q2, GrowGeneration posted a modest profit of $2.6 million, about 5.9% of its top line. That's an improvement from the first quarter, when it incurred a loss of $2.1 million. Still, in two of the past three quarters, GrowGeneration's finished in the red.
Profitability can be rare in the cannabis industry; many companies experience significant volatility on their bottom lines because of fair-value gains and losses and nonoperating items. That said, investors may be looking for more from a company that isn't directly involved in the production of marijuana.
Is GrowGeneration stock too expensive?
When the company released its most recent quarterly results, the stock skyrocketed, hitting a 52-week high of $22.88. It's since come down to about $15 per share. Even with this drop in price, the stock is still up by about 270%, leaving both the S&P 500 and the Horizons Marijuana Life Sciences ETF (HMLSF 6.16%) in its dust:
And if we compare GrowGeneration to other marijuana stocks, its valuation is favorable on a price-to-sales basis:
Does GrowGeneration belong in your portfolio?
If you're a cannabis investor, GrowGeneration is a definite buy.
For value investors, ideally, the company would be more consistently profitable. Amid such high growth, that may not be realistic, at least for the near future. But the good news is that the company did record a positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) number of $4.6 million in Q2, which was more than double the $1.7 million it reported in the prior-year period. Management is projecting a positive adjusted EBITDA between $17 million and $18 million this year. In 2021, it expects that to climb even further, to as high as $28 million.
Appropriately considering its name, growth at GrowGeneration shows no signs of slowing down. With store locations in Washington, California, Colorado, Florida, Michigan, and many other pot-friendly states, it's in a great position to continue generating strong sales numbers in the future. Management also plans to continue expanding until it has stores in all "major states" and Canada. Most recently, in June, it acquired the assets of H2O Hydroponics, LLC, which led the way for GrowGeneration to open a location in Lansing, Mich.
GrowGeneration has a better bottom line than many cannabis producers, it's still experiencing significant growth, and its valuation isn't expensive compared to other pot stocks. If you're bullish on the cannabis industry, then GrowGeneration's a stock that will look great in your portfolio.