GrowGeneration Corp: Up 590% Since March & Still Going?

GrowGeneration Corp
Image: @aleeenot via Twenty20

GrowGeneration Corp up 342% in 2020, But Still Undervalued

GrowGeneration Corp (NASDAQ:GRWG) is a marijuana stock that has everything going for it. It has a strong balance sheet, it has reported record revenue and net income for 10 consecutive quarters, and it continues to announce new acquisitions and expand into new markets.

Perhaps it’s no surprise then to see that, even during a pandemic, GrowGeneration stock continues to thrive, advancing 348% year-over-year, up 342% since the start of 2020, and soaring 590% since hitting March lows.

These winning ways are expected to continue over the last quarter of 2020 and over the coming years. Already the biggest provider of hydroponics in the U.S, the company could get much larger over the next couple of years. A few things would need to fall into place though.

Should there be a Blue Wave this November, it opens up the door to decriminalization. Especially with Senator Kamala Harris, who wants to end the federal prohibition of cannabis, as vice president.

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Senator Harris advocated the removal of marijuana from the Controlled Substances Act and was the lead Senate sponsor of the Marijuana Opportunity, Reinvestment, and Expungement (MORE) Act of 2019.

A big “if” indeed. But not that big.

The legalization of recreational cannabis in the U.S. on the federal level is an eventuality. And GrowGeneration could certainly be one of the biggest winners when it happens.

Until then, it’s already one of the best pot stocks out there.

Chart courtesy of StockCharts.com

GRWG Stock Overview

GrowGeneration Corp is the biggest hydroponic equipment supplier in the U.S., with 29 locations in 11 states, including California, Colorado, Michigan, Nevada, Washington, and, most recently, Arizona. The company is also actively targeting Illinois, Missouri, New Jersey, New York, and Pennsylvania. (Source: “Investor Presentation, October 2020,” GrowGeneration Corp, last accessed October 13, 2020.)

In addition to a growing list of traditional bricks-and-mortar locations, GrowGeneration also operates the online superstore HeavyGardens.com.

The Denver-based company sells its more than 10,000 hydroponics products to individual home growers and large multi-state operators. GrowGeneration also sells its own private-label products, sold under the “Sunleaves” brand.

GRWG is expected to expand its private-label products and sell them through other retailers.

There are a lot of people with deep pockets who believe GRWG has what it takes to be an industry juggernaut. The company is backed by private-equity from the founders of Cronos Group Inc (NASDAQ:CRON), Gotham Green Partners, Navy Capital, and Merida Capital Partners.

GRWG Enters Arizona Market with Strategic Acquisition

On October 12, GRWG announced it had entered the Arizona market with the acquisition of Hydroponics Depot, the largest indoor and outdoor garden center in Phoenix.

With this acquisition, GrowGen’s portfolio of hydroponic garden centers now includes 29 stores across 11 states. (Source: “GrowGeneration Acquires Phoenix-Based Hydroponics Depot,” GrowGeneration Corp, October 12, 2020.)

GrowGeneration enters the Arizona market at a time when voters are considering Proposition 207.

This law would allow for limited marijuana possession, use, and cultivation for adults 21 years of age or older. It would also amend criminal penalties for marijuana possession, impose a 16% excise tax on cannabis sales to fund public programs, and allow the expungement of marijuana offenses.

Arizona Pot Market and Projections

Arizona is one of the largest medical cannabis markets in the country, with projected 2020 sales of $700.0 million to $900.0 million.

If Prop 207 is approved, recreational and medical cannabis sales are expected to flourish, going from an estimated $770.0 million to $2.0 billion.

From January to May 2020, retail sales of medical marijuana products in the state rose nearly 20%.

GrowGeneration’s Financial Results

On August 13, GrowGeneration announced that revenue for the second quarter ended June 30 grew 123% year-over-year to $43.5 million.

Same-store sales were up 49% at $25.1 million, while store operating costs as a percentage of sales were 9.2% compared to 14% in the second quarter of 2019, a decrease of 34%. (Source: “GrowGeneration Reports Record Financial Results Q2 2020,” GrowGeneration Corp, August 13, 2020.)

Second-quarter net income was a record $2.6 million, or $0.07 per share, a 136% increase over net income of $1.1 million, or $0.04 per share, in the same prior-year period.

Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), meanwhile, climbed 166% year-over-year to $4.6 million from $1.7 million.

During Q2, GrowGeneration:

  • Added 167 new commercial customers, now serving over 700 commercial accounts
  • Generated over $100,000 per month in sales through its “Sunleaves” private-label nutrient and additives product line
  • Saw an increase in weekly walk-in transactions, up 50% quarter-over-quarter at 10,000
  • Acquired H2O Hydroponics LLC and consolidated it with the company’s West Lansing operations into a new 15,000-sq.-ft. super hydroponic garden center (with the combined business expected to generate over $8.0 million in annual revenue in 2020)

Also during the second quarter, on June 29, GrowGeneration was added to the Russell 3000 Index. The company says this move will increase long-term shareholder value by improving awareness, liquidity, and appeal to institutional investors.

Recent Events at GRWG

Subsequent to the end of the second quarter, GrowGeneration saw the following developments:

  • On August 10, the company surpassed $100.0 million in year-to-date revenues
  • It purchased the assets of Emerald City Garden, located in Concord, California
  • On August 12, 2020, GRWG entered into a partnership with Whole Cities Foundation, committing to donate free product to develop urban farms across the U.S.
  • On October 12, it entered the Arizona market with the acquisition of Hydroponics Depot

GrowGeneration’s Guidance

GrowGeneration raised its guidance for fiscal 2020 and provided guidance for 2021.

For fiscal 2020, GRWG expects to report:

  • Total revenue in the range of $170.0 million to $175.0 million, for year-over-year growth of between 112% and 118%
  • An increase in adjusted EBITDA guidance, up to $17.0 million to $18.0 million; this translates into year-over-year growth of approximately 165%

For fiscal 2021, GrowGeneration expects to report:

  • Total sales of $245.0 million to $260.0 million
  • Adjusted EBITDA in a range of $26.0 million to $28.0 million

Analyst Take

GrowGeneration continues to be one of the best cannabis plays in the U.S. Even during the pandemic, it was able to report record revenue and profitability.

Thanks to new acquisitions and products and a growing customer base, it should continue to report record results in the fourth quarter and 2021.

GRWG also has tremendous long-term growth potential, especially once recreational adult use marijuana is legalized. And that could be much sooner than later.