GrowGeneration: A Growth Stock for the Millennial Generation

GrowGeneration (NASDAQ: GRWG) is the nation's largest supplier of hydroponics. For those that are new to this space, hydroponics uses mineral nutrients mixed with water rather than soil to grow plants. A hydroponic setup enables cannabis plants to be grown in buckets or baskets which are suspended over a nutrient-filled water tank.

With 31 retail and distribution locations around the country, GrowGeneration operates the largest chain of hydroponic garden centers in the U.S. It sells thousands of products from organic nutrients to advanced lighting technology and hydroponics equipment to both commercial and home growers. The company's fast-growing e-commerce platform encompasses more than ten thousand products from the best-known brands in the business.

GrowGeneration is to commercial growers what Home Depot is to commercial builders. The big difference of course is that Home Depot (whose former CEO Bob Nardelli happens to be a strategic advisor) is a well-established company whereas GrowGeneration is in the very early stages of growth—and this is a good thing for the long-term investor. Imagine if you had bought Home Depot stock 20 or 30 years ago. That is the type of growth potential we are dealing with here.

What are GrowGeneration's Main Growth Drivers?

Appropriately, GrowGeneration sits in a great position to deliver long term organic growth. Today it has a presence in 10 states including most of the states where recreational marijuana is legal.

Management has its sights set on six additional states that will represent the next wave of growth—Missouri, Illinois, Arizona, Pennsylvania, New York, and New Jersey.  It is targeting the opening of approximately 22 stores across these new markets in 2021 which would almost double the company's still very nascent footprint.

If and when recreational marijuana use becomes legal nationwide, interest in home-grown cannabis planting solutions is likely to take off. Look no further than the recent growth in the multimillion-dollar home beer brewing market to see how fast consumers can flock to a novel recreational hobby.

But while home growing may get much of the attention, it’s the commercial market that is GrowGeneration's main growth driver. Commercial growers are the engine behind the company's recurring revenue growth. These higher volume customers purchase a wide range of consumables and non-consumables.

Consumables account for roughly 60% of GrowGeneration's revenue. This makes it an attractive business model from an investment standpoint because these are the products that are bought over and over again as they are used up.

How are GrowGeneration's Financials?

Revenue soared 175% to $79.7 million in fiscal 2019 as the company expanded its reach by building out its supplier partnerships and acquiring several companies. GrowGeneration bought seven stores last year and opened three of its own. This year the acquisition pace has slowed amid the pandemic, but it has still tacked on four more acquisitions including the valuable hydroponics.com e-commerce platform.

The balance sheet is healthy with a $56.7 million cash position and a minimal level of debt. With a market valuation under $900 million, GrowGeneration looks poised to cross the billion-dollar market cap threshold in short order, perhaps as soon as this month.

Revenue is up 123% through the first half of the current fiscal year to $76.5 million nearly matching last year's sales total—and despite the challenging operating conditions of 2020. On the heels of same-store sales growth of 58% and 49% in the first and second quarters, respectively, expectations will be high when GrowGeneration reports third-quarter results after the close on November 11^th.

As economic conditions generally improved during the reporting period in the company's key markets of California, Colorado, Michigan, and Maine, it is likely we will see growth well beyond what we saw in the first quarter. The consensus expectations for Q3 revenue ($47.3 million) and earnings per share (six cents) could be ripe for a beat.

In the same period last year, GrowGeneration posted revenue of $21.8 million, so we are looking at top-line growth of at least 117%. Based on the post-election buzz and likely surge in consumer interest in hydroponics, it wouldn't be surprising to see management increase its 2020 revenue guidance from the current $170 million to $175 million range.

But more important than the near-term performance is GrowGeneration's opportunity to grow alongside the hydroponics supply market. Revenue is forecast to grow 46% in 2021 and continue growing at a fast clip for several years thereafter.

Of course, the growth trajectory will largely depend on legislative action around marijuana legalization, but for now the momentum appears to be very much in GrowGeneration's favor. Millennials and other long-horizon investors looking for a leader in the cannabis space can expect a big growth harvest from GrowGeneration.