The marijuana industry has been booming even during a global pandemic. Marijuana was deemed an "essential item" during lockdowns in Canada and the U.S., which drove cannabis sales through the roof in both places -- U.S. legal cannabis sales grew 46% year over year to $17 billion in 2020.
Sales are on the rise this year, too, driving revenue and profits for cannabis companies. The U.S. cannabis industry, in particular, has been performing exceptionally well compared to its Canadian counterpart. Among the U.S. companies, Illinois-based Green Thumb Industries (GTBIF +5.66%) and Cresco Labs (CRLBF +3.65%) are my top picks at the moment. Both performed well in their most recent quarters, showing triple-digit revenue growth.
There's also one Canadian pot company, Canopy Growth (CGC +0.50%), that has been standing out from its peers as well -- mostly because of its strategic decision to partner up with U.S. beverage giant Constellation Brands, which is keeping its pockets full. Let's take a look at why these companies have the potential to be millionaire makers.
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1. Green Thumb Industries
Green Thumb's exceptional performance continued in its first quarter of 2021, with revenue up 89.5% to $194.4 million, driven by higher growth from all 12 states in which it operates. Increased foot traffic in its 56 retail stores and 13 new store openings during the quarter added to this remarkable performance. Higher revenue and a dip in selling, general, and administrative expenses to $59 million (30% of total revenue, down from 44% in Q1 2020) led to another quarter of positive adjusted earnings before interest, tax, depreciation, and amortization (EBITDA).
Positive EBITDA determines how well a company is handling its operating expenses, while net profits are its earnings after all the deductions. Green Thumb achieved both, recording an adjusted operating EBITDA of $71 million (up from $25.5 million in the year-ago period) and net profit of $10 million (compared to a net loss of $4.2 million in Q1 2020).
Management noted that the bulk of revenue growth came from the Illinois and Pennsylvania markets. In Illinois, its home state, recreational cannabis only became legal in January 2020. Adult-use sales alone are expected to total $1 billion in the state in 2021. Recreational cannabis is illegal in Pennsylvania, but efforts to legalize it are ongoing.
Green Thumb also expanded into the Virginia market by acquiring 100% of Dharma Pharmaceuticals, which will allow it access to one of five vertical licenses in the state. Virginia has legalized recreational cannabis starting in July, but retail sales won't begin until Jan. 1, 2024.
2. Cresco Labs
Illinois-based Cresco Labs also benefited from legalization in its home state, which is evident from its recent first-quarter results ended March 31. Revenue was up 169% year over year to $178 million, driven by expansion in both retail and wholesale. Retail revenue from 24 stores came in at $83 million, a surge of 193% from the year-ago period, while wholesale revenue also recorded a 151% year-over-year increase to $96 million.
Another quarter of positive adjusted EBITDA -- $35 million -- marked an impressive jump from a loss of $8.5 million in the year-ago quarter. The company isn't profitable yet, but with continued expansion and the rate at which it is growing its revenue and EBITDA, that won't take much longer.
"Run rate" is the metric used to estimate a company's future performance based on its past performance or historical data. By the end of 2021, Cresco's management hopes to achieve an annualized revenue run rate of more than $1 billion and an adjusted EBITDA margin run rate of at least 30%.
3. Canopy Growth
Though Canopy Growth isn't profitable yet either, the company is working hard to grow its revenue steadily while reducing EBITDA losses. In its fiscal Q3 2021, which ended Dec. 31, revenue was up 23% from the year-ago period to 153 million Canadian dollars. Management managed to reduce total selling, general, and administrative expenses to CA$144 million, and that lowered its EBITDA losses to CA$68 million, from CA$97 million in Q3 2020.
Canopy is in a good financial position with the backing of beverage giant Constellation Brands. Constellation invested CA$245 million into Canopy in 2017 and now holds a 38.6% stake in the company, after having exercised its existing warrants. This partnership has kept Canopy in safe waters while it focuses on launching more innovative derivatives products. Derivatives are recreational marijuana products that Canada legalized in October 2019. The company has offered a wide range of derivatives (vapes, edibles, and beverages) in the Canadian market that are receiving good customer feedback, according to management.
Canopy is working to grow its business in the Canadian cannabis market and also advance slowly into the U.S. It expects to achieve positive adjusted EBITDA by the second half of fiscal 2022. There will still be plenty of room to run; the global legal marijuana market could grow at a compound annual rate of 26.7% from 2021 to 2028, according to Grand View Research.
The marijuana boom is likely to continue in the U.S. with the increasing possibility of federal legalization. When that happens, both Green Thumb and Cresco Labs will be in a position to capture a huge chunk of the U.S. cannabis market. Canopy Growth along with its partner Constellation Brands will also be ready with innovative products to take advantage of a burgeoning space.
But can these pot stocks make you a millionaire? Let's take the example of Canopy Growth. If you were to buy 10,000 shares of Canopy's stock today, and if it were to get back to its 52-week high of $56.50, you would make a profit of nearly $560,000. For the investment to get to over $1 million, the stock would need to double and climb to $100. It is not impossible over the long term -- say, 10 years; U.S. federal marijuana legalization is almost inevitable by then. But that the marijuana industry is highly volatile, so risk-averse investors should consider starting with a small stake in these pot stocks.
