The pandemic-induced marijuana boom is taking the U.S. cannabis industry to new heights. This industry is poised to grow at a compound annual growth rate (CAGR) of 21% to be worth close to $41 billion by 2025. This estimate doesn't consider the possibility of federal legalization, so you can expect the market to be worth much more if the drug is legal by then.
Amid all this bullishness, U.S. cannabis stocks are shining. One among them, Illinois-based Green Thumb Industries' (OTC:GTBIF), is carving its path to becoming a leader in the cannabis space. Its strong financials are proof of that. Its expansion amid the pandemic was impressive, while many other smaller companies struggled to survive. The extraordinary growth of this pot company is despite a limited legal market in the U.S., so imagine the surge if federal legalization becomes a reality in the U.S.
The spectacular year that was 2020
Green Thumb Industries' stock surged 151% in 2020, a wild jump compared to the industry benchmark Horizons Marijuana Life Sciences ETF's 9% drop. The share price growth comes at no surprise when we look at Green Thumb's sales.
In its recent fourth quarter, ended Dec. 31, 2020, its total revenue surged 134% year over year to $177.2 million. The bulk of sales came from Illinois and Pennsylvania. Illinois, the company's home state, legalized recreational marijuana sales in January 2020. Since then, sales have been sky high, already touching $170 million in the first two months of 2021.
The company also saw positive earnings before interest, tax, depreciation, and amortization (EBITDA). EBITDA is measure of performance that reveals how well a company is tackling its operating expenses. It is different from net profits, which measure a company's earnings after all the deductions (interest, tax, depreciation, and amortization). Green Thumb's efforts were obvious from the fall in total selling, general, and administrative (SG&A) expenses, which came in at 30% of revenue versus 62% in Q4 2019. This dip in expenses brought in positive EBITDA of $61.3 million, compared to $7.8 million in the year-ago period.
How is 2021 shaping up?
Green Thumb ended Q4 with 51 retail stores in 10 states, and is already preparing to achieve a broader reach 2021. It has already opened five new stores this year.
The company's management has high hopes for the Illinois market, which has plenty of room to grow. In 2020, total legal cannabis sales in the state crossed $1 billion, and early indications point to 2021 beating that number. The company opened its 55th store in the state on March 31.
Management also thinks recreational cannabis markets in New York, Connecticut, New Jersey, and Pennsylvania could flourish once legalization is finalized. New York and New Jersey already made recreational cannabis legal this year, and Connecticut is taking steps toward legalization.
Green Thumb already operates dispensaries for medical cannabis in New Jersey and Pennsylvania, and it recently opened its 56th retail store in Pennsylvania. Green Thumb also intends to bring California's No. 1 cannabis beverage, Cann, to the Illinois market by this spring, and plans to launch the product in New Jersey's recreational market as well.
Even while expanding at a rapid pace, Green Thumb has kept its balance sheet strong. At the end of Q4, it had cash and cash equivalents of $83.8 million and total debt of $99.1 million. The company has to clear $342,000 of that debt within 12 months.
It is also important for investors to take note of its long-term operating lease obligations of $146 million. The legal status of marijuana prohibits companies from setting up production facilities and stores in the U.S. So, most of them have to operate dispensaries and production facilities that are leased. The amount these companies owe to the lessor is the lease obligation. Failing to clear the lease obligations could impact operations.
All signs point to go
Investing in stocks is like planting a seed. You plant it, and then wait patiently for it to bear fruit. You try not to focus on the short-term disruptions, as volatility in the stock market is common. Instead, you look at the bigger picture. Marijuana is an evolving industry that will no doubt face challenges. But it also has the potential for growth that a mature industry lacks.
Green Thumb Industries has proven its capability despite only a portion of states allowing legal cannabis in the U.S. Currently, only 36 states and the District of Colombia allow medical cannabis, while recreational use is allowed in 16 states and D.C.
The company has managed to secure additional 97 retail licenses that will allow it to strike when the iron is hot -- in this case, when more states legalize the drug or if federal legalization finally happens. Democratic control in the White House and Congress gives some hope that federal legalization could happen within a few years.
A stable balance sheet, massive revenue growth, a stronghold on various U.S. state markets, and rising profits could easily help Green Thumb become a market leader over a few years. This makes this cannabis stock one to buy and hold for the long term.