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GrowGeneration Wilted at the Open Today: Is It a Buy?

By Reuben Gregg Brewer – Jan 13, 2022 at 1:11PM

Key Points

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The company provided a somewhat dour guidance update, but does that change its long-term growth story?

What happened

Shares of GrowGeneration (GRWG -3.94%) tanked in early trading Thursday thanks to a guidance update management provided before the market opened. The market's response to the news was swift and ugly, with the stock price falling by 11.5% in just a few minutes.

However, there are two ways to look at the new guidance. And it's important to keep in mind as you consider the update that GrowGeneration is a retailer of hydroponic equipment, which is the main technology used to grow marijuana. The cannabis industry has been growing quickly in the U.S. as states across the country legalize the drug's use. Some industry players project that in 2025, cannabis sales will be more than double what they were in 2020.

A person inside an industrial marijuana grow house writing in a notebook.

Image source: Getty Images.

A glass half empty...

Let's start with the negative view. GrowGeneration lowered its full-year 2021 revenue guidance from the $435 million to $440 million range it forecast at the end of the third quarter to a new range of $420 million to $422 million. Previously, it was forecasting $41 million to $43 million in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). Now, it anticipates EBITDA in a range of $31.5 million to $33.5 million.

A key piece of the story is likely the 12.3% year-over-year decline in same-store sales in the fourth quarter. Basically, it looks like the company was expecting stronger sales, and they didn't materialize. Investors don't like it when a company falls short of its own projections, so some sold the stock. That's not shocking and actually makes some sense. But is it the right long-term call? 

...or a glass half full?

The thing is, as noted above, the marijuana industry is expected to grow rapidly in the years ahead, and GrowGeneration is well-positioned to benefit. In fact, it just acquired a provider of racking systems that get used in industrial hydroponic setups such as those used to grow cannabis. So it continues to make moves that should support the long-term opportunity it is trying to exploit. And, like it or not, small (the market cap here is a mere $600 million or so), rapidly growing companies often stumble a little along the way.

But what about the growth picture? Although GrowGeneration is expecting to fall short of its previous expectations, that new forecast revenue range is still more than double the $193 million it pulled in during 2020. That's massive year-over-year growth no matter how you look at it. On the adjusted EBITDA side of the equation, the midpoint of the updated range is nearly 70% above the $19.2 million GrowGeneration achieved in 2020. That, too, doesn't offer much to complain about. And neither of these updates suggests that the company's long-term story has materially changed.

GRWG Chart

GRWG data by YCharts

The bigger question is what was driving the same-store sales drop off in the fourth quarter. There are any number of potential reasons for that weakness, including the latest coronavirus wave and the persistent supply chain disruptions the world is dealing with. But it is worth pointing out that full-year same-store sales growth is expected to come in at 24.4%.

So, while some traders are clearly jumping ship, investors with a long-term view should probably wait for GrowGeneration's Q4 earnings conference call in March before coming to any conclusions, rather than overreacting to this guidance update. There's just not enough information yet to suggest that the direction of the retailer's future has been materially altered. In fact, after this latest price cut, some might even view GrowGeneration shares as a rather attractive bargain.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool owns and recommends GrowGeneration Corp. The Motley Fool has a disclosure policy.

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