GrowGeneration Corp: This “Pick-and-Shovel” Pot Stock Is Soaring to New Highs

A Top Pot Stock You Likely Haven’t Considered

When people talk about pot stocks, they are usually referring to companies that grow, process, and sell cannabis products. However, marijuana producers are not the only ones capitalizing on this booming industry. GrowGeneration Corp (NASDAQ:GRWG), for instance, does not grow a single marijuana plant, yet it is one of the hottest pot stocks on the market right now.

Allow me to explain.

Headquartered in Denver, Colorado, GrowGeneration is an owner and operator of specialty hydroponic and organic gardening stores. The company was founded in 2014 and has now become one of the largest hydroponic product retailers in the country, with 28 stores in 10 states. (Source: “About,” GrowGeneration Corp, last accessed August 20, 2020.)

Hydroponics is a method of growing plants without soil by using mineral nutrient solutions in a water solvent. In the marijuana industry, a lot of commercial and home cultivators have been growing cannabis hydroponically.

In other words, if you consider the legal pot industry to be the new “gold rush,” then GrowGeneration Corp is essentially selling the picks and shovels.

If you visit one of GrowGeneration’s garden centers, you’ll see that it sells thousands of products.

The company has about 10,000 stock keeping units (SKUs) available—ranging from hydroponic equipment, to organic nutrients and soils, to advanced lighting. The stores, which have an average size of 6,911 square feet, generated $441.00 in sales per square foot in 2019. (Source: “Investor Presentation May 2020,” GrowGeneration Corp, last accessed August 20, 2020.)

The neat thing about GrowGeneration is that approximately 60% of its revenue comes from the sale of consumable products, which helps drive repeat business.

Of course, with the COVID-19 outbreak, the U.S. retail industry has taken a substantial hit, with numerous stores ordered to shut down. However, GrowGeneration Corp was deemed an essential supplier to the agricultural industry and therefore has continued operating despite the pandemic.

In fact, if you take a look at GrowGeneration’s latest earnings report, you’ll see that the company has actually been firing on all cylinders.

In the second quarter of 2020, GrowGeneration generated $43.5 million of revenue, representing a whopping 123% increase year-over-year. Same-store sales totaled $25.1 million for the quarter, up 49% year-over-year. (Source: “GrowGeneration Reports Record Financial Results Q2 2020,” GrowGeneration Corp, August 13, 2020.)

This marked the 10th consecutive quarter in which GrowGeneration generated record revenues.

Income from store operations in the quarter was $7.6 million, or $17.5% of the company’s revenue in the second quarter of 2020. Again, this marked a substantial improvement because, in the second quarter of 2019, its income from store operations was $3.1 million, or $15.8% of revenue.

Net income came in at $0.07 per share for the reporting quarter, up from $0.04 in the year-ago period.

The company also managed to grow its online business by 149% year-over-year in the second quarter.

Keep in mind that for most retailers, the second quarter of 2020 was an extremely difficult period. And yet, GrowGeneration Corp was still churning out huge growth numbers.

Now, there is still uncertainty going forward, and a lot of companies have pulled their full-year guidance in light of the pandemic. GrowGeneration, on the other hand, actually raised its outlook.

In May, the company was projecting $135.0 to $140.0 million in revenue and $12.0 to $14.0 million in adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) for full-year 2020. (Source: “GrowGeneration Reports Record Q1 2020 Revenues of $33.0 Million and Record Adjusted EBITDA of $2.7 Million,” GrowGeneration Corp, May 14, 2020.)

Now management expects the company to earn $170.0 to $175 million in sales and $17.0 to $18.0 million in adjusted EBITDA this year. (Source: GrowGeneration Corp, August 13, 2020, op. cit.)

And that’s not all, in 2021, GrowGeneration is expected to further grow its business and deliver $245.0 to $260.0 million in sales and $26.0 to $28.0 million in adjusted EBITDA.

Commenting on the company’s latest financial results, President and Co-Founder Michael Salaman said, “It was a great quarter for the company, but I can tell you that GrowGen is certainly – doesn’t rest on its laurels. We’re looking at an even better third quarter and fourth quarter and looking forward to surpassing our guidance for 2021.” (Source: “GrowGeneration Corp. (GRWG) CEO Darren Lampert on Q2 2020 Results – Earnings Call Transcript,” Seeking Alpha, August 13, 2020.)

GrowGeneration Corp (NASDAQ:GRWG) Stock Chart

Chart courtesy of StockCharts.com

Analyst Take

Due to the nature of GrowGeneration’s business—selling hydroponic equipment and supplies rather than growing cannabis—GRWG stock had existed in the shadow of the big-name pot producers for quite some time.

But by delivering a blowout quarter in a challenging time, GrowGeneration stock suddenly became a hot commodity. Since the company’s second-quarter earnings release on August 13, GRWG stock has skyrocketed about 100%.

Bottom line: GrowGeneration Corp has entered the main stage. As the cannabis industry keeps booming, this “pick-and-shovel” pot stock could deliver big returns.