Hydrofarm Stock: Undervalued Pot Stock Has 250% Upside

Hydrofarm Holdings Group Inc Reports Strong Results

There’s a lot of momentum in the U.S. regarding the legalization of recreational marijuana. In early April, the U.S. House of Representatives passed a bill to decriminalize cannabis. Days later, the House passed a medical marijuana research bill.

At the state level, New Mexico and New Jersey both started legally selling recreational pot in April. Moreover, Maryland lawmakers are putting a recreational marijuana measure on their November ballot. (Source: “New Mexico Cannabis Sales Top $5.2 Million in First Weekend,” Office of the Governor of Michelle Lujan Grisham, April 4, 2022.)

Pot stocks, on the other hand, haven’t been having such a good run lately. Until recreational cannabis is legalized at the federal level, marijuana stocks will probably flit around looking for support.

One overlooked cannabis stock that has been taking an undeserved beating is Hydrofarm Holdings Group Inc (NASDAQ:HYFM). Currently trading around $10.27, HYFM stock is down by:

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  • 37% over the last month
  • 44% over the last three months
  • 63% year-to-date
  • 83% year-over-year

Those are pretty grim numbers, but thanks to Hydrofarm Holdings Group Inc’s wonderful fourth-quarter and full-year 2021 financial results—and its robust financial outlook—Hydrofarm stock’s future appears to be bright.

Not surprisingly, Wall Street has jumped on the HYFM stock bandwagon. Of the analysts providing a 12-month price target for Hydrofarm stock, their average estimate is $27.67 and their high estimate is $36.00. This points to potential upside of approximately 170% to 250%.

Chart courtesy of StockCharts.com

About HYFM Stock

Hydrofarm Holdings Group Inc is a leading North American manufacturer and distributor of hydroponics equipment and supplies.

The company’s product categories are Equipment, Grow Media, Lighting, Nutrients, and Supplies. Its Nutrients category includes fertilizers and a variety of other additives that provide nutrition to crops. (Source: “Investor Presentation: March 2022,” Hydrofarm Holdings Group Inc, last accessed April 27, 2022.)

That’s great for people who grow flowers, fruit, grains, herbs, or vegetables. The company’s biggest financial growth driver, though, is cannabis.

The majority of Hydrofarm Holdings Group Inc’s sales are of products that are exclusively—or primarily—sold by Hydrofarm. Furthermore, 37% of the company’s revenue base is manufactured in-house. About 68% of Hydrofarm’s sales are of consumables with recurring revenue streams.

The company has seven manufacturing sites and eight distribution locations in North America. It also owns one distribution location in Spain.

5th Acquisition Since May 2021

Hydrofarm Holdings Group Inc has an aggressive acquisition strategy.

Since May 2021, the company has invested $505.0 million in five acquisitions, at an average multiple of seven times adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).

Hydrofarm Holdings Group Inc’s merger-and-acquisition strategy has resulted in the addition of new manufacturers to its proprietary portfolio, including Greenstar Plant Products, Inc. in Canada, Aurora Innovations, Inc. in Oregon, and HEAVY 16, House & Garden, and Mad Farmer in California.

In November 2021, Hydrofarm closed on its $52.0-million acquisition of Innovative Growers Equipment, Inc., a manufacturer of horticulture benches, racking, and LED lighting systems. (Source: “Hydrofarm Completes Acquisition of Innovative Growers Equipment, Inc.,” Hydrofarm Holdings Group Inc, November 1, 2022.)

Great 2021 Results & Robust 2022 Outlook

For the fourth quarter ended December 31, 2021, Hydrofarm announced that its revenue increased by 26% year-over-year to $110.4 million. (Source: “Hydrofarm Holdings Group Announces Fourth Quarter and Full Year 2021 Results,” Hydrofarm Holdings Group Inc, March 1, 2022.)

The company’s fourth-quarter 2021 gross profit increased by 16.7% year-over-year to $18.7 million, while its net loss increased slightly to $11.0 million, or $0.25 per share, from a fourth-quarter 2020 net loss of $10.0 million, or $0.43 per share.

Its adjusted EBITDA inched downward from $5.0 million in the fourth quarter of 2020 to $4.9 million in the fourth quarter of 2021.

Hydrofarm Holdings Group Inc’s full-year 2021 revenue climbed by 40% year-over-year to $479.4 million, while its gross profit increased 59.5% year-over-year to $101.5 million. The company swung to full-year profitability of $13.4 million, or $0.31 per share, from a 2020 net loss of $9.9 million, or $0.46 per share.

The company’s adjusted net income in 2021 was $25.4 million, or $0.59 per share, compared to $7.3 million, or $0.21 per share, in 2020. Its adjusted EBITDA soared by 123.4% in full-year 2021 to $47.1 million.

For full-year 2022, Hydrofarm Holdings Group Inc expects to report revenue growth of 20% to 28%, or about $575.0 to $615.0 million. It also expects to report full-year adjusted EBITDA of $63.0 to $74.0 million, or approximately 11% to 12% of its net sales.

Analyst Take

Hydrofarm Holdings Group Inc is a fabulous cannabis play that has seen its share price take an undeserved hit. In addition to its solid balance sheet and wonderful full-year 2021 results, the company has achieved a net sales compound annual growth rate (CAGR) of 19% over a period of more than 15 years.

As for growth drivers, since May 2021, Hydrofarm has completed several acquisitions that are expected to increase its net sales and adjusted EBITDA. To further support its manufacturing operations, the company has expanded its distribution centers and production space by almost 70%.

Moreover, in late 2021 and early 2022, the company took several initiatives to reduce its expenses and mitigate inflationary pressures, including increasing its prices and “rightsizing” its headcount.

Hydrofarm Holdings Group Inc has essentially done everything it can to support its financial growth in 2022 and beyond. That bodes well for the value of Hydrofarm stock.