According to Grandview Research, the cannabis market in the United States could grow from $13.2 billion this year to $40 billion in 2030. Cannabis is steadily being legalized state by state, and this momentum has investors turning over stones to find the industry's winning stocks.
But rather than try to pick the right horse, play the field by considering cannabis supplies retailer GrowGeneration (GRWG -4.47%). Probably no one is expecting much from the stock since it has fallen 90% from its high, but the company's fundamentals and recent performance could position it to be 2023's best pot stock.
Here is why it could deliver significant returns next year and beyond.
Strong fundamentals to survive the storm
GrowGeneration has had a tough go in 2022; in the chart below, you can see that revenue has declined quite a bit. Cannabis is still illegal at the federal level, making it harder for industry operators to find funding. Recession fears across the economy have stunted growth in the industry, and GrowGeneration's management has pointed to such. Since it sells supplies and equipment for growing cannabis, a hiccup in the industry will hurt the company, too.
GRWG revenue (TTM); data by YCharts. TTM = trailing 12 months.
But this company doesn't seem like it's going away. It still has a ton of cash on its balance sheet -- $71 million against virtually zero debt -- while the business has lost only $4 million over the past year. The existing cash should get the company through any short-term hurdles. Meanwhile, business could begin picking up soon.
Recent momentum could start 2023 off strong
There is evidence of that recovery in GrowGeneration's third-quarter earnings. Management raised its full-year revenue guidance from a range of $250 million-$275 million to $270 million-$280 million. The company is also calling for smaller EBITDA losses of $10 million-$13 million versus prior guidance of $12 million-$15 million. In other words, management is saying that business is better than it thought it would be a few months ago.
Investors will have to see how the company performs, but it's an encouraging sign. The legalization of cannabis across the United States is still an ongoing trudge, but it's progressing. Midterm elections saw two more states legalize recreational marijuana use, Maryland and Missouri, though three states did vote against similar propositions. Grandview's research indicates optimism that the industry will continue growing, increasing GrowGeneration's potential market opportunity.
A bargain at today's prices
You can see from the chart below that GrowGeneration's valuation has been highly volatile over the years. After soaring to a high price-to-sales ratio of 15, the stock returned to Earth. It trades at a similar valuation today as Home Depot, a potential competitor that sells hydroponics and other supplies. But on the one hand, you have a behemoth worth hundeds of billions versus GrowGeneration's market capitalization of just $355 million. The company needs to return to growth and prove itself, but it's hard to deny the potential upside at such a small size.
GRWG PS ratio; data by YCharts.
Companies this small are typically riskier investments, but GrowGeneration seems to have a sturdy financial foundation that should keep the business on its feet through these challenging times.
The cannabis industry probably isn't going away, which makes the stock a potential home run once the company returns to growth and investors' sentiment toward shares improves. Keep GrowGeneration on your radar for 2023 and beyond.
