It is hard to turn a small investment into millions by investing in stocks from an already developed sector -- there is no room for growth. But marijuana is still a nascent industry with tremendous expansion ahead. Stocks in this emerging space have the potential to make you rich.
Given the rate at which the U.S. marijuana industry is evolving, it wouldn't be a surprise if some top cannabis companies could turn your investments into millions within five to 10 years. One such company is Illinois-based Green Thumb Industries (GTBIF -0.81%). Its stock price has jumped by 389% in the three years since it started trading in 2018, compared with the S&P 500's growth of 57%. Let's take a look at how the company is progressing this year and how its future could play out.
Green Thumb has taken full advantage of the marijuana boom
With a market cap of $7.4 billion, Green Thumb is one of the MSOs (multi-state operators) that has expanded most aggressively in the U.S. cannabis market. Currently, it operates 56 dispensaries across 13 U.S. states. It recently entered into the Virginia cannabis market by acquiring 100% of Dharma Pharmaceuticals. This acquisition gave Green Thumb control of one of five vertical licenses in the state (which includes an operating production facility and a retail store).
Virginia legalized recreational cannabis in July, but retail sales won't begin until Jan. 1, 2024. In some of Virginia's neighboring states (North Carolina, Tennessee, and Kentucky), cannabis is illegal for any use; in others (Maryland and West Virginia), recreational cannabis is still illegal. People in those states are likely to take advantage of Virginia's recreational market, meaning more sales for Green Thumb.
According to management, Green Thumb recorded good sales growth in the first quarter of 2021 (ending March 31) from all 12 states it operated in,with prominent growth seen in key markets like Pennsylvania and its home state of Illinois. Revenue jumped 89.5% year over year to $194.4 million in Q1 from 56 of its open and operating retail stores.
Illinois is a rather new market; the state made recreational cannabis legal on Jan. 1. 2020, and sales have been scorching ever since. The Illinois market has already generated $510 million in recreational sales in the first five months of 2021. Experts predict the state could easily surpass $1 billion in sales this year if this trend continues. Green Thumb, which operates seven dispensaries in the state, could take advantage of the rising sales. The company also partnered with Cann, California's No. 1 cannabis beverage brand, to bring the drink to Illinois in April, and it plans to expand to other states this year.
Management is also excited about the New York and New Jersey cannabis markets, both of which recently legalized recreational marijuana. Green Thumb already operates two stores in New Jersey and is planning to open another in the coming months, as management stated in the earnings call. It also operates a medical dispensary in New York and is also turning a former federal prison in New York into a cannabis facility.
A profitable cannabis company
Green Thumb is steadily expanding, opening 13 new stores in the first quarter of 2021 that contributed to revenue growth. It also brought in another quarter of positive earnings before interest, tax, depreciation, and amortization (EBITDA), as well as net profits. Adjusted operating EBITDA grew from $25.5 million in the year-ago period to $71 million, and net profit came in at $10 million compared to a net loss of $4.2 million in Q1 2020. It marked the third consecutive quarter of profits for the company.
EBITDA measures how well a company is handling its operating expenses, whereas true net profits are a company's earnings after all the deductions are made. Profitability is a rare occurrence among cannabis companies. Green Thumb's Canadian counterpart Canopy Growth, which is a bigger company with a market cap of $8.3 billion, is still struggling to achieve positive EBITDA. Besides growing revenue and profits, Green Thumb also has a stable balance sheet to support its expansion. It ended its Q1 with cash and cash equivalents of $275.9 million and $100.1 million of total debt outstanding.
The future looks bright for this pot stock
If you had purchased 10,000 shares of Green Thumb at the IPO, you would have a profit of nearly $200,000 today, given its current trading price of about $31. If the stock were to increase by the same 389% or more in the next few years, purchasing 10,000 shares of it now could make you a millionaire. And if this business was able to grow by that much in a limited legal market in just three years, chances are a repeat is possible, especially with U.S. federal legalization nearly inevitable in that time. We can also expect to see more global market opportunities by then for Green Thumb as more and more countries legalize marijuana. We will know more about its growth strategies for this year when it releases its Q2 results Aug. 11.
The average price target for Green Thumb is $46.40, implying a 51% upside in the next 12 months. Given the rate at which the company is growing its revenue, EBITDA, and profits while aggressively expanding into new legal markets, I do not doubt the potential of this pot stock.