GrowGeneration Stock Looks Compelling After 50% Discount

GrowGeneration Corp: The “Home Depot” for Hydroponics

For those who like to grow their own cannabis plants, the sourcing of hydroponics equipment is critical. In Canada, the law permits individuals to grow up to four marijuana plants at home for personal use. The rules in the U.S. are scattered, but many states also allow people to grow marijuana at home.

Growing your own cannabis is cheaper than going to a dispensary; you just need to understand the mechanics of growing and nurturing the plants. That’s where GrowGeneration Corp (NASDAQ:GRWG) can help.

The company operates a growing network of hydroponic gardening retail centers. (Source: “Company Profile,” GrowGeneration Corp, last accessed August 30, 2021.)

GrowGeneration has pursued an aggressive expansion strategy. It currently operates 60 stores in 12 states, including the key markets of California, Colorado, and Michigan.

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Geared to the fast-increasing at-home and commercial marijuana-growing market, the company is well positioned to succeed as the go-to place for hydroponics supplies.

But GrowGeneration stock has been on a steady decline after trading at a record $67.75 during the “Reddit”-fueled rally in February. GRWG stock has seen its share price get shaved by more than 50%, so I now view GrowGeneration Corp as an aggressive, contrarian opportunity.

While the risk/reward proposition is compelling with GrowGeneration stock, a major risk for the company is competition, especially if the likes of Home Depot Inc (NYSE:HD) and/or Lowe’s Companies Inc (NYSE:LOW) decide to expand into the hydroponics segment.

In terms of technical analysis, GRWG stock is searching for support after recently entering a death cross pattern, which is a bearish technical signal that appears when the 50-day moving average breaks below the 200-day moving average.

There is minor support at $30.00, with the major downside risk at $20.00.

Chart courtesy of StockCharts.com

Strong Fundamentals Support Bull Case for GRWG Stock

A glance at GrowGeneration Corp’s five-year revenue picture shows four consecutive years of strong growth, including triple-digit growth from 2018 to a record $193.4 million in 2020.

The company’s revenues grew by 2,318% in the last five years, leading to a compound annual growth rate (CAGR) of 121.7%.

Fiscal YearRevenues (Millions)Growth
2016$8.0N/A
2017$14.480.0%
2018$29.0101.9%
2019$79.7174.9%
2020$193.4142.5%

(Source: “GrowGeneration Corp.” MarketWatch, last accessed August 30, 2021.)

GrowGeneration beat the consensus revenue estimate in 2020, and the estimates have been ramping higher, driven by acquisitions.

Watch for the company’s revenues to jump by 142.3% to $468.6 million this year and by 31.4% to $615.5 million in 2022. (Source: “GrowGeneration Corp. (GRWG),” Yahoo! Finance, last accessed August 30, 2021.)

The last two years saw GrowGeneration produce earnings before interest, taxes, depreciation, and amortization (EBITDA) income, with impressive 312.7% growth in 2020.

Fiscal YearEBITDAGrowth
2016-$373,030N/A
2017-$2.7 Million-623.5%
2018-$3.9 Million-14.7%
2019$2.6 Million167.5%
2020$10.9 Million312.7%

(Source: MarketWatch, op. cit.)

As far as profitability goes, GrowGeneration Corp turned positive in 2019 and 2020 in terms of generally accepted accounting principles (GAAP) earnings per share (EPS).

Fiscal YearGAAP Diluted EPSGrowth
2016-$0.05N/A
2017-$0.18-260.0%
2018-$0.22-20.0%
2019$0.04118.1%
2020$0.11194.1%

(Source: MarketWatch, op. cit.)

The company’s aggressive retail expansion helped drive up the consensus profit estimates. GrowGeneration is expected to make $0.46 per diluted share this year and $0.65 per diluted share in 2022. (Source: Yahoo! Finance, op. cit.)

GrowGeneration Corp’s free cash flow (FCF) has been negative, but with the expected growth in revenues and profits, I wouldn’t be surprised to see positive FCF.

Fiscal YearFCF (Millions)Growth
2016-$1.7N/A
2017-$4.2-148.4%
2018-$2.248.2%
2019-$5.6-157.9%
2020-$4.028.6%

(Source: MarketWatch, op. cit.)

The company’s balance sheet has solid working capital, a manageable debt of $33.1 million, and ample cash of $124.5 million. (Source: Yahoo! Finance, op. cit.)

Analyst Take

GrowGeneration stock is a compelling play on the increase of at-home and commercial marijuana growing in the U.S. The key factor following the company’s acquisitions will be its ability to drive organic growth to power its revenues.

Institutions appear to like GrowGeneration Corp’s story. About 309 institutions hold a 52.1% stake in its outstanding shares. (Source: Yahoo! Finance, op. cit.)

The bottom line is that, as recreational marijuana becomes more mainstream, I would expect rising demand for hydroponics supplies. As such, investors might want to accumulate GRWG stock on the price weakness.