Given that its shares are up by 65% in the last 12 months, it shouldn't be too surprising to anyone that investors are wondering whether Green Thumb Industries (GTBIF 3.56%) is worth buying.
These gains aren't a fluke. But this cannabis company isn't an investment without risks. So to get a balanced picture, let's consider two reasons to think about buying, and one reason to sell.
It's positioned in freshly opened state cannabis markets
The biggest reason to buy Green Thumb Industries stock right now is that it's operating in the right places at precisely the right time to reap benefits.
Green Thumb has a nationwide marijuana retail footprint that includes 90 different retail locations. Many of those are in states that recently legalized marijuana. And in Virginia, Minnesota, and Ohio, all of which initiated recreational cannabis sales within the past six months, it's already generating new revenue.
The takeaway for shareholders is clear: Expect a faster pace of top-line growth in 2024. Furthermore, expect the company's recent efficiency improvements and cost savings to be put to the test. It's harder to focus on efficiency when there's so much revenue to be made by reaching a bit further into markets that are clearly demanding more.
It finally has enough money to do share buybacks
During the past 12 months, Green Thumb repurchased $25 million of its shares, which was equivalent to 1% of its shares outstanding. It still has another $25 million authorized in its repurchasing program, which expires in September. Investors are very likely to see more buybacks in the coming quarters, boosting their returns.
More importantly, although the company isn't consistently profitable or generating regular free cash flow (FCF)-- what's left from cash flow after business investments and capital spending -- the company is finally starting to occasionally produce enough excess cash to suggest that additional share repurchasing will be on the way in the future. In the third quarter, FCF was $6.6 million, though its trailing 12-month (TTM) cash outflow is $19 million. When compared to its cash burn of $106.6 million in 2019, it's clear that Green Thumb's efficiency improvements are leading it in the right direction, so it's possible that routine cash generation is around the corner, perhaps in the next 24 months. And that's another reason to buy the stock.
Not enough differentiation from the competition (yet)
Cannabis businesses have many bugbears, and unfortunately Green Thumb is falling victim to one of the most common: It doesn't have any competitive advantages to protect it from getting its cannabis market share stolen by rivals.
The most obvious competitive advantage it could one day have is a set of strong brands that consumers prefer thanks to their distinctive properties or favorable pricing. Think about how people have their favorite brands of beer or wine; the products they prefer are not necessarily the very finest or cheapest, they're the ones that fit their specific tastes.
But there isn't yet any evidence of such a brand in Green Thumb's portfolio. Although it's true that its cannabis flower, vaporizers, and edibles are growing to become somewhat larger shares of its revenue in comparison to other product categories, it hasn't shown any evidence of its brands being particularly valuable in terms of drawing repeat customers. Nor has it made claims about low-cost production methods or anything else that might give it a durable edge.
Nonetheless, people don't build loyalty to a brand overnight, and there is no sign that any of the company's competitors are any further along in their quests to develop strong brand identities. So although it might be a smart idea to consider selling this stock if it can't create a competitive advantage in the long run, for today every other cannabis business confronts the same challenges.
