Please ensure Javascript is enabled for purposes of website accessibility

Could Cresco Labs Be a Millionaire-Maker Stock?

By Zhiyuan Sun - Apr 28, 2021 at 6:17AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This cannabis operator nearly quadrupled its sales last year. Can it keep up its momentum?

Cresco Labs (CL 5.77%) (CRLBF 4.64%) has been flying high over the past year. Through the last 12 months, shares of the No. 1 cannabis wholesaler in the country are up a whopping 180%. Despite its fast-paced developments, its stock is trading at an absolute bargain. Some investors think the opportunity to make millionaire-level money off Cresco Labs' stock is almost over. What gives? 

Man holding a jar of dried cannabis in a dispensary shop.

Image source: Getty Images.

Spectacular results

Last year, Cresco Labs' revenue increased by 271% over 2019 to $476.3 million. Simultaneously, its operating income less non-cash items (EBITDA) improved by an astonishing 1,350% to $116 million. The company is currently the largest wholesaler in the country; $274 million of its total revenue comes from the segment. Its catalog contains over 5,000 unique weed products which can be found in more than 920 dispensaries. Cresco Labs owns and operates 32 shops in 10 states.

Is the growth sustainable? 

Given the results, Cresco Labs looks ridiculously cheap. Its stock is trading at just 3.2 times forward revenue. Why? The company has relied on inorganic growth over the past two years. In 2019, it had just 100 million shares outstanding. By the end of 2020, that number had risen to about 384.8 million. It's hard to convince investors to buy the stock in the face of more dilutions, which suppress bottom-line gains. Most of the cash raised in its stock offerings went toward buying out competitors. 

In 2019, Cresco Labs paid $823 million to acquire Origin House, a Canadian pot grower doing business in California. On Jan. 14, 2021, the company announced it would be expanding into Florida with the $213 million acquisition of Bluma Wellness. Bluma operates seven dispensaries in the Sunshine State, with plans to open eight more. It had the second-highest store sales in Florida, behind Trulieve Cannabis. The company also has a robust two-day statewide delivery service; 15% of its sales come from this segment.

On Feb. 16, Cresco Labs closed the acquisition of Verdant Creations. For $3.5 million in cash and stock, it added four additional dispensaries to its banner. The company was able to secure a rock-bottom purchase price as it bought the company during the height of the coronavirus pandemic, when many dispensaries were struggling.

Last month, Cresco acquired Massachusetts dispensary chain Cultivate Processing for $90 million. The subsidiary operates two dispensaries, with plans to open a third this quarter.

Along with these deals came a massive pile of debt. Cresco Labs' long-term liabilities ballooned from $143.76 million in 2019 to $413.73 million. Luckily, it does have the means to service its liabilities and interest payments, as its operating margin improved by 38 percentage points year over year to 11.7%.

What's the verdict?

For the time being, Cresco Labs' growth remains sustainable. This is because of the massive demand for pot across the country and the opening of new markets like New York. I could envision the company becoming a millionaire-maker stock over the next few years. However, investors may want to plan their exits eventually, as the current business model mandates that Cresco Labs keeps growing. It is quite susceptible to declines in demand (say, from market oversaturation) as it needs those sales gains to justify the value of new acquisitions.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Cresco Labs Inc. Stock Quote
Cresco Labs Inc.
$2.93 (4.64%) $0.13
Trulieve Cannabis Stock Quote
Trulieve Cannabis
$12.89 (5.66%) $0.69
Cresco Labs Inc. Stock Quote
Cresco Labs Inc.
$3.85 (5.77%) $0.21

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/06/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.