On Jan. 14, Cresco Labs (OTC:CRLBF) announced that it would be expanding into Florida through the acquisition of Bluma Wellness. The all-share transaction will cost Cresco approximately $213 million worth of its stock, and in return Cresco will instantly gain seven dispensaries with the opportunity to open eight more. It's a strategic move for the company, but it's a risky one too.

Large multistate operators Curaleaf and Trulieve Cannabis (OTC:TCNNF) already have strong positions in Florida, which won't make it easy for Cresco to gain significant market share there. Let's take a closer look at the company's current business and the Florida market to determine whether this is a good move for the Cresco or if it will just lead to headaches for investors down the road.

Marijuana plant in the sunset.

Image source: Getty Images.

Does Cresco need to expand into more states?

Currently, Cresco labs has 20 retail locations (plus one in Philadelphia that it says is "coming soon") across six states, including 10 in its home state of Illinois. In Ohio, Massachusetts, and Arizona (which legalized marijuana for recreational use in November), it has just one location in each of these states, and so there's plenty of room for the company to expand in the regions where it is already active. And Massachusetts is pretty lucrative market; sales there came close to $700 million in 2020, representing a 56% increase from the previous year.

Florida-based Trulieve provides a good example of how out-of-state expansion isn't necessary for success. Although the company technically has a presence in multiple states, 72 of its 77 dispensaries are in Florida. And that hasn't stopped it from generating incredible growth. Over its last three quarters, Trulieve reported sales of $353.1 million -- double the $173.1 million it recorded in the previous year.

By comparison, Cresco has reported sales of $313.9 million over the same period, growing at an even more impressive rate of 260%. The company's third-quarter sales of $153.3 million for the period ending Sept. 30, 2020, were 63% higher just from the previous period. Cresco's management credits the strong numbers to expanding its capacity in both Illinois and Pennsylvania. It also noted strong growth in California.

To keep those high growth numbers going, it's inevitable that Cresco will need to continue expanding. But is Florida the best option for that?

The Florida marijuana market is attractive -- but is it getting crowded?

Marijuana sales in Florida could top nearly $1.5 billion this year with the inclusion of the new edible segment, which could contribute $250 million all on its own. That would be close to three times the roughly $500 million market Florida was in 2019. And that's without the recreational adult-use market, which could be legalized as early as next year.

But the challenge is that as big cannabis operators, including Trulieve and Curaleaf, ramp up their operations there, it'll make for a hotly contested market. A year ago, there were 222 dispensing locations serving 306,185 qualified patients in the state, which comes out to one dispensary per 1,379 patients. As of Jan. 22, there were 467,405 people in Florida who held valid marijuana ID cards and 310 dispensing locations. The ratio of people per dispensing location has increased, and now there is just one location for every 1,508 people.

For Cresco, which isn't extremely aggressive when it comes to the number of locations it operates, there appears to be plenty of room to generate some decent market share even as other big-name competitors keep growing.

Is Cresco stock a buy on this news?

For a relatively modest $213 million purchase price, it's hard to say the Bluma acquisition is a bad move for Cresco. It's not forking over millions in cash to do the deal and it's getting into an attractive market that could boost its sales. Gaining access to Florida is going to be important for Cresco to start building its brand there (especially before more competitors enter the space ahead of adult-use legalization). And this acquisition doesn't prevent the company from continuing to grow its presence in the states where it already has operations set up. 

The company isn't likely going to compete head on with Curaleaf and Trulieve in the Florida market, but it also doesn't have to. Cresco picks its spots carefully and is strategic about where it expands. In Chicago, for instance, it has a location near Wrigley Field, which (if not for the pandemic) would be a hot spot during baseball season. That's why although the Florida market is getting more competitive, Cresco should still be able to find success there.

In the past 12 months, the pot stock has risen more than 110%, outperforming the Horizons Marijuana Life Sciences ETF, which is up 17% over the same period. And with even more expansion on the way, this year could continue to be a strong one for Cresco and its shareholders.

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.