The cannabis industry is unattractive to investors now. Slow to no progress toward federal legalization has dragged down cannabis stock prices over the last two years. Surprisingly, the industry is expanding rapidly not only in the United States but also globally.
Companies in a developing industry have a lot of room for expansion. Green Thumb Industries (GTBIF 3.56%) is one such cannabis multi-state operator (MSO) that is doing exceptionally well, despite its stock performance.
Green Thumb's revenue growth is consistent even in a difficult cannabis market
Oversupply and pricing pressure in the U.S. has resulted in lower revenue for most cannabis growers. In that context, Green Thumb's continued revenue growth, even at modest levels, is impressive.
The company saw a 2% year-over-year revenue jump to $249 million in its most recent first quarter. In a highly competitive industry, Green Thumb has managed to grow its revenue from $216 million in 2019 to $1 billion in 2022.
The company focuses on limited-license markets where only a few cannabis companies can operate. This strategy has enabled the company to build a loyal customer base and generate consistent profits. It has reported positive net income under generally accepted accounting principles (GAAP) for 10 consecutive quarters, which is unusual for most cannabis companies. It also reported a GAAP net income of $9 million in the first quarter.
Management is happy with its progress this quarter despite challenging times. In the Q1 earnings call, CEO Benjamin Kovler said, "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."
Its debt levels are low
Most of its peers have increased their debt load in an attempt to expand quickly. Green Thumb, on the other hand, has played it safer, maintaining lower leverage levels. The chart below compares its debt-to-equity ratio to that of its peers.
GTBIF Financial Debt to Equity (Quarterly) data by YCharts.
Green Thumb's total store count has increased from 39 in eight states in 2019 to 79 in 15 states in 2023. Peer Trulieve Cannabis, on the other hand, has 186 locations and reported $1.2 billion in revenue in 2022. Curaleaf Holdings has 152 locations across the country and made $1.3 billion in revenue last year.
Steady growth over the years has allowed Green Thumb to keep debt low. Its debt-to-equity ratio of 0.15 indicates that the company does not rely heavily on debt to operate or expand.
At the end of the first quarter, Green Thumb had $278 million in outstanding debt and $185 million in cash and cash equivalents. In 2023, Green Thumb plans to open 15 new stores in Virginia, Pennsylvania, Minnesota, Nevada, and Florida. If the company can generate consistent profits, it should be able to repay this debt and continue expanding.
Consistent profitability could make it a top cannabis player
This year, many more states in the U.S., including Pennsylvania, Florida, Maryland, and Minnesota, may legalize adult-use cannabis. Expanding in these new markets could help Green Thumb generate consistent profits. Under the Rise brand, the company operates a few stores in these states.
Aside from the massive American market, Green Thumb has a lot of room to grow in the European market if it so desires.
Experts believe that if Germany legalizes marijuana fully, many other European countries will follow suit. According to projections, the European medical cannabis market will grow at a compound annual rate of 61%, reaching a value of $14 billion by 2028.
While federal legalization in the U.S. is still unlikely, the cannabis markets have begun to saturate. To cut costs and achieve profitability, most MSOs are closing down operations in key state markets. The good news is that Green Thumb hasn't faced a similar issue yet and still remains profitable.
Nevertheless, Green Thumb has a long way to go before becoming a fully successful cannabis company. The stock is currently undervalued, with a price-to-sales ratio of 1.9. This cannabis stock may be worth the risk for investors with a high risk tolerance and a willingness to hold the stock until the company realizes its full potential. However, it would be prudent to begin with a small investment in Green Thumb alongside a diversified portfolio of stable stocks.
