The cannabis industry doesn't look as enticing to investors as it did a few years ago. In recent years, it has struggled, owing primarily to a lack of progress toward federal legalization. Even if pot stock prices do not reflect it, the industry as a whole is dramatically expanding.
Like any other emerging industry, the cannabis industry is undeniably risky. However, one advantage of nascent industries is that they are made up of companies with a lot of room for growth.
According to industry experts, the cannabis market in the U.S. could grow at a compound annual rate of 14% over the next decade, reaching $40 billion by 2030. Savvy investors understand that only stable and profitable companies will likely survive this intense competition. One of them could be Green Thumb Industries (GTBIF 3.56%). Let's look at why.
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1. Even in a difficult environment, Green Thumb's revenue is increasing
Due to oversupply and price compression, most cannabis companies are struggling to increase revenue. Despite these challenges, Green Thumb is experiencing impressive revenue growth.
Green Thumb has quadrupled its revenue from $216 million in 2019 to $1 billion in 2022 in a highly competitive industry. This has also allowed the company to be consistently profitable, which is rare for most cannabis businesses. For 10 consecutive quarters, it has reported positive net income under generally accepted accounting principles (GAAP).
In the most recent first quarter, total revenue increased 2% year over year to $249 million. It also reported a GAAP net profit of $9 million. The company's strategy of targeting key limited-license markets drove this performance. These state regulators issue licenses to select cannabis companies. Because of this Green Thumb could maintain a loyal customer base, which may work in its favor in the future.
Talking about Q1 results, CEO Benjamin Kovler stated, "Zooming out, given that the industry is still feeling pricing compression, inflationary pressure on input costs, lack of progress in D.C., and limited access to capital, we feel good about delivering solid results in the first quarter."
2. Slow and steady growth is working its magic
Green Thumb, unlike some of its competitors, does not have a stronghold on the American cannabis market. However, the company has grown steadily. Its total number of stores has grown from 39 in eight states in 2019 to 79 in 15 states in 2023.
Meanwhile, Trulieve Cannabis has 186 locations (as of May) and reported $1.2 billion in revenue in 2022. Curaleaf Holdings operates 152 locations and brought in $1.3 billion in revenue last year. Even with just 79 stores, Green Thumb is giving a tough fight to its peers in terms of revenue and is also profitable. The company intends to open 15 new stores in Virginia, Pennsylvania, Minnesota, Nevada, and Florida in 2023.
This slow and steady growth has kept the company from making any harsh decisions that could have strained its balance sheet.
3. It has kept its debt low
Green Thumb had $278 million in outstanding debt and $185 million in cash and cash equivalents at the end of the quarter. If Green Thumb continues to generate consistent profits, debt repayment should not be a major concern.
Unlike its Canadian counterpart Aurora Cannabis, Green Thumb did not go on an acquisition spree, which would have increased its debt burden. Most of its competitors have increased their debt loads through mergers and acquisitions. The chart below compares Green Thumb's debt-to-equity ratio to that of its peers.
TCNNF Financial Debt to Equity (Quarterly) data by YCharts
Its debt-to-equity ratio of 0.15 (total debt divided by total shareholders' equity) indicates that it has a healthy amount of debt. A lower debt-to-equity ratio indicates that a company is not heavily dependent on debt to function or grow drastically.
For the time being, the company is playing it safe while expanding at a good pace. Green Thumb could also benefit from opportunities in the European market, as its competitor Curaleaf Holdings has done. By 2028, the European medical cannabis market could grow at a compound annual rate of 61%, reaching a value of $14 billion.
It is financially capable of establishing itself in the developing European market if it chooses to expand.
If it maintains its revenue growth streak, it can remain a profitable company even in the massive American cannabis market. This year, more states, including Pennsylvania, Florida, Maryland, Ohio, and Minnesota, may legalize adult-use cannabis. Under the Rise brand, the company operates a significant number of stores in these states. It opened two new locations in Pennsylvania and Minnesota last month.
The stock is currently trading at a price-to-sales ratio of 1.6, making it an excellent time to invest. Cannabis stocks carry some risk, so a smart strategy would be to start with a modest investment in Green Thumb as part of a well-diversified portfolio of stable stocks.
