Thinking long-term in terms of investing in cannabis stocks isn't magic. While past performance isn't a guarantee of future success, these companies have already found a formula for profitability in an industry that's still in its infancy.

GrowGeneration (NASDAQ:GRWG), Trulieve Cannabis (OTC:TCNNF) and Innovative Industrial Properties (NYSE:IIPR) all had huge revenue growth in the past quarter. That growth is allowing the three to expand through acquisitions while keeping debt-to-equity levels low.

Their early success will be a big advantage over competitors as more states open up to legalized marijuana sales and the industry expands.

Marijuana grower checks on a plant in a field.

Image source: Getty Images.

GrowGeneration is living up to its name

Shares of GrowGeneration are up only 3% for the year, sluggish compared to the 91% growth in share price we saw over the same timeframe in 2020. But by looking at the company's financial fundamentals, it's not hard to see that the current share price presents an opportunity to get in on a stock that will serve you well for the next decade.

Unlike some cannabis stocks, this one is consistently in the black. The company is the country's largest seller of hydroponic equipment, with 57 retail outlets and an online superstore. It doesn't actually deal with marijuana itself, which is why its shares can be sold on the Nasdaq.

In the first quarter, through March 31, the company reported $90 million in sales, up 173% year over year. Net income was $7.7 million, up from a loss of $2 million in the same period in 2020.

GrowGeneration's equipment is sold to cannabis companies as well as regular consumers, so as more states relax cannabis laws, there's built-in growth expected. A report by Precision Reports estimated the compound annual growth rate for hydroponic sales to be 6.8% from 2021 to 2024.

GrowGeneration recently increased its guidance to say it expected yearly revenue of $450 million to $470 million, compared to $193 million last year, and adjusted EBITDA of $54 million to $58 million, up from $19.2 million in 2020. It has been actively buying up hydroponic stores, adding 14 in the last quarter,  and expects to have 100 stores by 2023.

TCNNF Financial Debt to Equity (Quarterly) Chart

TCNNF Financial Debt to Equity (Quarterly) data by YCharts

Trulieve is sticking to a playbook that is working

Shares of Trulieve Cannabis are up more than 8% this year. The company is one of the most profitable cannabis purveyors, posting positive EBITDA for 13 consecutive quarters. The company dominates its home state of Florida, with 86 stores there, and last week, was responsible for 41% of the state's overall medical marijuana sales in terms of milligrams of THC, 40.5% of the state's low-THC cannabis milligrams, and 47% of the state's smokable marijuana sales in terms of ounces.

It appears ready to dominate in Arizona assuming its purchase of Harvest Health & Recreation is approved by Harvest's shareholders in the third quarter of 2021. Harvest Health is the biggest player in Arizona's medical marijuana program, with 15 retail outlets there, and now that the state has opened up to adult-use sales, is seeing sales surge.

Harvest, unlike Trulieve, isn't profitable yet, but its first-quarter sales were $88.8 million, up 101% year over year and 27% sequentially, with a gross margin of 53.9%, up from 44.8% in the fourth quarter of 2020.

In the first quarter, Trulieve reported record revenue of $193.8 million, up 15% sequentially and 102% year over year. It also had net income of $30.1 million, up 27% year over year, and gross margin of 70%.

Innovative Industrial Properties takes the risk out of cannabis

Shares of Innovative Industrial Properties are up more than 17% so far this year. The real estate investment trust (REIT) caters exclusively to the cannabis industry, buying properties from companies, providing them with much-needed capital, and then leasing those properties back with long-term, inflation-protected triple-net leases.

In the first quarter, Innovative reported revenue of $42.9 million (a 103% jump year over year), and adjusted funds from operations (AFFO) of $1.47 per diluted share (up 116% over the same period in 2020). It also raised its dividend 6% to $1.332 per share, which works out to a current yield of 2.4%.

The company's dividend is well covered with a cash dividend payout ratio of 69.85%. The company also has a low debt to total gross assets ratio of 7.8%. Its funds from operations are expected to rise, with the company spending $312 million this year to purchase over 1.1 million square feet of rentable space.

That's a good deal for Innovative Industrial Properties and its investors. There is risk involved, of course, as the volatility of the cannabis business means that some companies could have difficulty paying rent, but business has been good. Through July 6, the company said it had a 100% lease rate on its 72 properties, with the average lease term having 16.7 years remaining.

Finding the most appropriate choice

Industrial Innovative Properties is probably the safest choice as its revenue is consistent and not directly dependent on cannabis sales. GrowGeneration is another safe investment in the long term because it will do well regardless of which cannabis growers emerge. Its stock price could drop further this year as it rose 428% over the past 12 months, but it seems to be a likely winner over the next decade.

Of the three, I see Trulieve having the most growth over the next decade. The company's addition of Harvest Health & Recreation, provided it goes through, will allow it to continue its high rate of revenue growth. 

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.