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Why GrowGeneration Tumbled More Than 20% in August

By Jennifer Saibil – Sep 5, 2021 at 10:42AM

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The cannabis supplier is growing fast, but not as fast as the stock.

What happened

GrowGeneration (GRWG -5.35%), which sells hydroponic supplies and equipment for the cannabis industry, saw its stock skyrocket at the beginning of the year. But it's since been slowly dropping, and it lost another 21% last month, according to data from S&P Global Market Intelligence.

So what

GrowGeneration is a cannabis industry supplier, not a grower itself. That makes it more immune to industry ups and downs and gives it more leverage to grow as the industry grows, making it a popular stock to hold.

A man in a greenhouse nursery of Cannabis plants.

Image source: Getty Images.

It's demonstrating tremendous growth, which is why the stock gained more than 800% in 2020, and almost 50% in 2021 by February. But since then, it's been slowly falling. That's partially due to a sky-high valuation, and partially due to growth constraints.

Revenue increased 143% year over year in 2020, and EBITDA (earnings before interest, taxes, depreciation, and amortization) increased 262%. It operated 58 stores as of the end of the second quarter, with the intention of opening eight more by the end of the year. It also sells its products through partner retailers. 

Growth is accelerating so far in 2021, with sales up 190% year over year in the second quarter. Earnings per share nearly doubled in the three-month period. After the first quarter, management raised guidance to sales growth of 115% to 123% for fiscal 2021, representing a slight slowdown year over year.

Cannabis is an industry that comes with many rules and regulations that differ from one U.S. state to another. For example, recreational cannabis was recently approved in New York and New Jersey, but neither has started licensing. GrowGeneration is also having trouble opening stores because of building supply issues.

Now what

GrowGeneration has created a cannabis-supply empire with multiple revenue streams, including its wholesale, retail, and private-label products and its omnichannel shopping options. Growth is intense, but not quite as fantastic as its past stock gains -- which partially explains why the stock is now cooling down.

Growing pains mean that the company is dealing with supply and regulatory issues, but these are temporary matters. As the stock tumbles, valuation is also becoming less of an issue, and investors may want to consider a position.

Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends GrowGeneration. The Motley Fool has a disclosure policy.

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