GrowGeneration Corp: 10x Return from a “Pick-and-Shovel” Pot Stock?

Check Out This Soaring Pot Stock

As the legal pot industry enters the main stage, companies that grow, process, distribute, and sell cannabis and cannabis-infused products are getting a lot of attention. And thanks to their impressive growth and potential, many pot producers have delivered astronomical gains to investors in recent months.

However, those are not the only names worth considering for pot stock investors. For instance, GrowGeneration Corp (NASDAQ:GRWG) does not have any cannabis cultivation or processing facility, nor does it operate any pot dispensary. But investors who loaded up on GRWG stock early on are now laughing all the way to the bank.

You see, GrowGeneration owns and operates specialty retail hydroponic and gardening stores. It currently has 50 stores located across 11 U.S. states. At the same time, the company operates an e-commerce store, and the majority of its physical stores also function as warehouse, distribution, and fulfillment centers.

Hydroponics is about growing plants without soil by using mineral-nutrient solutions in a water solvent. You can grow a variety of crops hydroponically, such as lettuce, tomatoes, and peppers. But the main catalyst for hydroponics retailers is likely cannabis, as both commercial and home cultivators have been using hydroponics to grow pot.

Indeed, GrowGeneration Corp has been providing full-service product and solution offerings for multi-state marijuana operators, commercial growers, and other growers of all sizes.

Therefore, you can think of the company’s business as selling the picks and shovels in the cannabis gold rush.

And as that new gold rush takes place, GrowGeneration stock has started taking off.

Look at the chart below. At the beginning of May 2020, GRWG stock was trading at $4.56 per share. As of this writing, it’s at $49.20.

In other words, GrowGeneration stock has increased in value by more than 10 times its original price.

To be honest, I didn’t discover the company that early; my first profile of GRWG stock was published on August 21, 2020. In that Profit Confidential article, I said, “GrowGeneration Corp has entered the main stage. As the cannabis industry keeps booming, this ‘pick-and-shovel’ pot stock could deliver big returns.”

Since that article was published, GrowGeneration stock has skyrocketed by more than 180%.

GrowGeneration Corp (NASDAQ:GRWG) Stock Chart

Chart courtesy of StockCharts.com

One thing that made GrowGeneration Corp stand out, in my opinion, was the substantial recurring portion of its business. If you only sell equipment that can be used over and over again—which is the case with most gardening tools—customers will just make one-time purchases and keep using those tools.

GrowGeneration, on the other hand, sells thousands of products, including hydroponic equipment, organic nutrients and soils, and advanced lighting. The sale of consumable products accounts for about 60% of the company’s total revenue. (Source: “Investor Presentation: ICR Conference 2021,” GrowGeneration Corp, last accessed February 26, 2021.)

Because consumables are used up relatively quickly by hydroponic growers, these customers tend to visit GrowGeneration’s stores on a regular basis. And while they are there, they may also buy additional products to improve their growing facilities. To GrowGeneration, the substantial consumable products business has created a recurring revenue stream.

At the same time, GrowGeneration Corp has been very resilient during the COVID-19 pandemic. We know that, due to the pandemic and the ensuing lockdowns, many retailers have been struggling. GrowGeneration’s business, on the other hand, has kept on growing.

Preliminary Fourth-Quarter Results

The company is yet to report its official results for the fourth quarter of 2020 at the time of this writing, but it did announce some preliminary numbers in January.

In particular, GrowGeneration said it generated $61.5 million of revenue in the fourth quarter of 2020, which marked a 142% increase year-over-year. Its same-store sales, a critical measure of a retailer’s operating performance, rose 58% for the quarter. (Source: “GrowGeneration Preannounces Record Full-Year 2020 Revenues and Increases Preliminary 2021 Guidance,” GrowGeneration Corp, January 11, 2021.)

In full-year 2020, the company’s revenue surged 140% year-over-year to $192.0 million while its same-store sales rose 63%.

Considering that 2020 presented many unprecedented challenges for the retail sector, the hydroponics retail chain’s growth figures were extremely impressive.

And the best could be yet to come. In the preliminary earnings press release, GrowGeneration Corp’s chief executive officer, Darren Lampert, said, “We expect significant revenue growth in the year ahead as we continue to execute on these initiatives.” (Source: Ibid.)

He continued, “Accordingly, we have raised our 2021 revenue guidance to $335-$350 million, our 2021 adjusted EBITDA guidance to $38 million-$40 million, and increased the number of projected GrowGen store locations to 55.”

Analyst Take

Under the evolving regulatory environment, competition is getting intense in the legal cannabis industry.

But no matter how the competition landscape evolves—or which company becomes the most dominant pot producer—many growers will need hydroponic equipment and materials. GrowGeneration Corp can fulfill their needs.

In other words, the growth theme for GrowGeneration stock remains intact.