Hydrofarm Holdings Group Inc: Overlooked U.S. Pot Stock Capitalizing on Green Wave

Outlook Bullish for Hydrofarm Stock

The stock market is busy trying to figure out where it wants to go. Or rather, it’s looking for some sort of motivation to soar. The major indices may be at record levels, but for the most part, they’ve been trading sideways for the last number of months. Investors, it seems, are waiting to see what the Federal Reserve is going to do with interest rates.

Now could be the perfect time to look at stocks that have taken a breather—stocks that have incredible upside in growth markets.

With that in mind, few industries are as bullish as cannabis.

Pot stock investors are increasingly optimistic that marijuana will be legalized at the federal level in the U.S. in the coming years. That would be an unimaginable boon to the industry. But even if marijuana doesn’t become legal at the federal level, the outlook for the green wave is massive.

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When it comes to the U.S. cannabis industry, one of the most unjustly overlooked stocks is Hydrofarm Holdings Group Inc (NASDAQ:HYFM). It’s probably overlooked because it only went public in December 2020.

Still, HYFM stock was able to benefit from broad-based, optimistic investor sentiment from December to February but gave up ground on rising yields.

Hydrofarm stock has traded in a relatively tight range since then. It had tested support near $55.00 but recently broke below that level and is trading near $50.00. That move to the downside was industry-wide, coming after the Democrats’ blueprint for marijuana legalization was met with trepidation.

Regardless, cannabis is legal on some level in many U.S. states, and the green wave is only going to get bigger. Keep in mind, Hydrofarm Holdings Group Inc is more than just a cannabis play. The company serves the entire controlled-environment agricultural industry.

So while the recent sell-off may be a little unjustified, it has put HYFM stock in a better trading range.

Chart courtesy of StockCharts.com

HYFM Stock Overview

Hydrofarm Holdings Group Inc is a leading North American distributor and manufacturer of hydroponic equipment and supplies. While its products are ideal for growing marijuana, they’re also used to grow, farm, and cultivate flowers, fruit, plants, vegetables, grains, and herbs.

The company’s products are used to control farming variables such as temperature, carbon dioxide, light intensity, and nutrient concentration. (Source: “About Hydrofarm,” Hydrofarm Holdings Group Inc, last accessed July 29, 2021.)

The company’s product categories include lighting, equipment, grow media, nutrients, and supplies.

Its nutrients category includes products that provide nutrition to crops for hydroponic cultivation, such as fertilizers and a variety of additives used throughout the crop cycle.

Hydrofarm Holdings Group Inc’s equipment product offerings include hydro components, meters, pumps, irrigation systems, and water filtration systems.

According to the company, its 5,000-plus products are available everywhere, with six U.S. distribution locations and two in Canada. It also operates a facility in Zaragoza, Spain.

Recent Acquisitions

To be “everywhere” means that Hydrofarm Holdings Group Inc needs to launch its own innovative products and acquire those of others. Since the start of 2021, Hydrofarm has made three acquisitions.

In May, Hydrofarm acquired premium nutrient maker Heavy 16 for roughly $78.0 million. Hydrofarm expects Heavy 16 to generate approximately $23.0 million in net sales in 2021. (Source: “Hydrofarm Completes Acquisition of Premium Nutrient Maker HEAVY 16,” Hydrofarm Holdings Group Inc, May 4, 2021.)

In June, Hydrofarm acquired House & Garden, Inc. for $125.0 million. House & Garden manufactures and supplies hydroponic nutrients and equipment. Its brands include “House & Garden” and “Mad Farmer.” (Source: “Hydrofarm Completes Acquisition of Premium Nutrient Producer House and Garden,” Hydrofarm Holdings Group Inc, June 1, 2021.)

On July 1, Hydrofarm completed the $161.0-million acquisition of Aurora Innovations, Inc., a Eugene, OR manufacturer and supplier of organic hydroponic products. (Source: “Hydrofarm Completes Acquisition of Aurora Innovations and its Organic Nutrients and Grow Media Operations,” Hydrofarm Holdings Group Inc, July 1, 2021.)

$309.8 Million From Public Offering

In early May, Hydrofarm announced the closing of a previously announced underwritten upsized public offering of 5.5 million shares at a public offering price of $59.00 per share, plus the full exercise by the underwriter to purchase additional shares. (Source: “Hydrofarm Holdings Group Announces Closing of Public Offering of Common Stock and Full Exercise of Underwriters’ Option to Purchase Additional Shares,” Hydrofarm Holdings Group Inc, May 3, 2021.)

The net proceeds were approximately $309.8 million. Hydrofarm will be using those net proceeds for acquisitions, working capital, and other general corporate purposes.

Strong First-Quarter 2021 Results

In May, Hydrofarm announced its financial results for the first quarter ended March 31 and increased its full-year guidance.

The company’s revenue increased by 66.5% year-over-year to $111.4 million. (Source: “Hydrofarm Holdings Group Announces First Quarter 2021 Results,” Hydrofarm Holdings Group Inc, May 13, 2021.)

Its gross profit doubled to $23.2 million, or 20.8% of net sales, compared to $11.6 million, or 17.3% of net sales, in the same prior-year period.

The company reported first-quarter 2021 net income of $4.9 million, or $0.13 per share. That was a big improvement from the first-quarter 2020 net loss of $3.7 million, or a loss of $0.18 per share.

Hydrofarm Holdings Group Inc’s pro forma adjusted net income in the first quarter of 2021 was $7.3 million, or $0.19 per pro forma share, compared to a loss of $1.6 million, or a pro forma loss of $0.05 per diluted share, in the first quarter of 2020.

The company’s adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) jumped to a record $9.9 million, from $1.6 million in the same period of 2020.

Bill Toler, chairman and CEO, commented,

We’re pleased to report strong results to start 2021, which included our third straight quarter of organic sales growth of approximately 60% or more and a new record quarter of Adjusted EBITDA at $9.9 million, as we continue to benefit from broad growth across our product lines, geographies, and brand categories.

(Source: Ibid)

Thanks to the company’s great first-quarter performance and the closing of the Heavy 16 acquisition, Hydrofarm Holdings Group Inc updated its full-year 2021 guidance.

The company now expects its net sales to grow by between 30% and 40%, with stronger growth in the first half than the second half. Hydrofarm expects its adjusted EBITDA to be in the range of $36.0 to $42.0 million, representing full-year growth of 8.1% to 8.9%.

Analyst Take

Hydrofarm stock is an excellent way for investors to take advantage of the cannabis industry, especially those who don’t like the idea of investing in pure-play marijuana companies.

Thanks to strong tailwinds in the cannabis industry, Hydrofarm Holdings Group Inc has massive long-term growth potential—not that the company is hurting in the sales department. Over the last 15 years, Hydrofarm has experienced double-digit revenue growth, with a path to mid-teen organic revenue growth over the long run.

If you believe the company’s management, Hydrofarm has “only scratched the surface of the opportunity in front of [it].”