With cannabis stocks looking beaten-down and cheap thanks to a brutal bear market in 2022, it's no wonder that investors are questioning whether the industry's gold rush era is gone for good. For marijuana companies implementing big expansion plans, like Green Thumb Industries, (GTBIF -0.04%) queries are even more pressing, as the competition looks to be getting hotter over time.
But a lot can change in a few years, and investors with long-term mindsets tend to prosper. So let's analyze Green Thumb's long-term potential in light of the ongoing market phenomena and get a better idea about whether the ship to riches has sailed.
Why it could be a bit late
The core reason why it might be too late to buy Green Thumb Industries stock is that its period of rapid revenue growth is definitively over, at least for now. This chart shows the issue:
GTBIF Revenue (Quarterly) data by YCharts
As you can see, after experiencing a sharp run-up in 2020 and 2021, its pace of expansion slowed markedly, and it hasn't started to recover yet -- despite marking trailing 12-month (TTM) revenue of just over $1 billion.
Impressively, the company was narrowly profitable for most of the last three years, but now its margins are coming under pressure, and a few consecutive quarters of unprofitability wouldn't surprise anyone. The culprit for the declining margins and slower top-line growth is likely that the U.S. cannabis market is overflowing with marijuana that's getting cheaper by the day.
When cultivators produce more cannabis than there's consumer demand for, it drives prices down while simultaneously making it harder for companies to grow their market shares. But it takes a while for producers to trim their output in response to the market, so once a downtrend starts it can take a while to normalize. None of this has anything to do with Green Thumb specifically, but it's still starkly affected, and it will continue to be until the market for cannabis corrects itself.
That's a compelling argument for why it's too late to start a position in the stock right now. Buying shares of Green Thumb today means riding its share price all the way down during the cannabis market's oversupply issues. If the business had a strong competitive advantage, like brands with high customer loyalty, or a cultivation technique that enabled low-cost production, it might be a different story, as it'd be better equipped to ride out the marijuana winter while retaining its market share.
Unfortunately, Green Thumb's brands probably aren't powerful enough to keep customers coming back. To be fair, its competitors largely share the same problem, because cannabis hasn't been legalized for very long in most places in the U.S. To solve that issue, it plans to spend more on marketing to boost its brands, which could drive its margins down further. But it's already spending a lot; for reference, its TTM selling, general, and administrative (SG&A) expenses were around $288.6 million, which is 28.8% of its TTM revenue.
There's still time, but it's quite risky
Regardless of the bearish outlook for Green Thumb in the immediate future, it could still be a favorable purchase longer-term. Late last year, it inked a deal with convenience store chain Circle K to set up medical marijuana dispensaries next to its locations in Florida. That means whenever the market bounces back, it'll be favorably positioned to capture fresh demand. It'll also have a network of stores that are likely to be along customers' daily commutes, which will serve to reduce the friction of making a purchase.
Plus, as time goes by, there's a good chance that people will develop some kind of preference for their marijuana products. At least some of them might respond to Green Thumb's branding and marketing efforts. But hoping for the best is more or less the opposite of investing with confidence.
So if you're willing to take a significant risk based on fuzzy factors like brand strength, this stock is one decent option for speculation, and it isn't too late to invest. It doesn't have a high chance of going under anytime soon, and the expected long-term growth of the cannabis market could easily make it a winner.
But if you're looking for Green Thumb to grow profitably as it did over the past few years, it's way too late this time around. Check back in a couple of quarters to see if the market is looking less saturated with weed, which will show up as a return to stronger revenue growth year over year.
