GrowGeneration is fertile ground for investors looking to cultivate their cannabis portfolio without risk

If you’re not part of the hydroponics or organic gardening community, you’ve probably never heard of GrowGeneration Corp (OTCMKTS:GRWG).

But with nearly US$25mln in working capital, access to both debt and equity financing, and growing revenues, GrowGeneration won’t remain unknown within the cannabis investment community for very long.  

GrowGen is a US$85mln company with a single goal in mind: To become one of the largest hydroponic and organic specialty gardening retail outlets in the industry.

The Denver-based company currently operates 18 retail hydroponic/gardening stores spread out across six states, but, because GrowGeneration’s management expects 14 additional states expected to legalize cannabis cultivation in the next few years, the company has an aggressive expansion plan.  

So, whether you’re a commercial cannabis grower serving thousands or a home-based organic farmer providing for just yourself, GrowGeneration has thousands of products — from organic nutrients and soils to advanced lighting technology and state of the art hydroponic equipment — to keep your operation running at full production.

A blow-out second quarter

For the second quarter 2018 GrowGeneration reported the following: 

•    Revenue of US$7.15mln, an increase of 74% compared to the 2Q 2017 figure of US$4.1mln.

•    A 13% decline in store operating costs.

•    The company ended the second quarter with working capital of US$24.5mln, which compares very favorably to working capital of US$5.6mln at the end of Q4 2017.

•    The company raised approximately US$12mln in equity capital via common stock issuance and the exercise of warrants and US$9mln in convertible debt financing for the six-month period ended June 30, 2018.

GrowGeneration co-founder and CEO Darren Lampert said this about his company’s quarterly performance: 

“This was another great quarter of sales for GrowGeneration, clearly demonstrating the demand for our products and the scalability of our business as we continue our expansion plans. Our company continues to attract capital, raising $21 million in debt and equity financing for the six months ended June 30, 2018, strengthening our balance sheet to $17.4 million in cash and $24.5 million in working capital. GrowGen now is operating in 6 states, with 18 commercial and retail stores, with over 100,000 sq. ft. and servicing hundreds of licensed commercial growers. We are now forecasting a revenue run rate of approximately $42 million coming out of 2018.”

Years of growth ahead

GrowGen’s management believes there are about 1,000 hydroponic stores in operation in the US, and thanks to the exponential growth in the cannabis markets, they expect U.S. hydroponic sales to exceed US$4.5bn by 2020. But conducting business within a high growth industry isn’t enough. Management needs to have a plan to capitalize on the influx of demand. 

In GrowGen’s 10-Q filed on August 14, 2108, management said the following:  

“Our growth has been fueled by frequent and higher dollar transaction from commercial growers, individual home grower and gardeners who grow their organic foods. We expect to continue to experience significant growth over the next few years, primarily from existing and new stores that we open or acquire.” [emphasis my own]

 The company is focusing on four channels to grow the business:

1.    Establishing new stores in high-value markets.

2.    Internal growth at existing stores.

3.    Acquiring existing stores with loyal customer bases and consistent operating histories.

4.    Creating a business to business e-commerce portal at the company’s GrowGeneration website.

GrowGen is laying the groundwork to be the go-to retail outlet for both commercial and home-based cannabis and organic growers. And with an increasing number of states moving toward both medical and recreational legalization, the company’s aggressive strategy should prove timely as demand for hydroponics seems unlikely to level off anytime soon.

 Stuck in consolidation

GrowGen’s stock has been rotating between US$3.50 and US$5.20 for the past five to six months, but I don’t view the current consolidation bearishly.

GrowGen isn’t a company running on financial fumes or operating without a saleable product. Between the US$9mln raise announced on January 12, 2018, and another US$10mln on May 9, GrowGen has secured enough funding to execute its growth and acquisition model during the third and fourth quarters of 2018.

Even better, GrowGen followed through on its omnichannel sales and distribution strategy in mid-July 2018 by launching its B2B Platform on Amazon.com (NASDAQ:AMZN). GrowGen will now be able to meet its customers’ needs on a direct basis anywhere in the country with two-day delivery. 

As investors learn about GrowGen’s growth acquisition model, and as the company delivers on its expectation of significant sales and revenue growth, I expect to see shares of this company trading back above (and remaining above) US$5.

The bottom line

Despite federal and state legal headwinds, most analysts expect the cannabis industry to grow by leaps and bounds over the next five to 10 years. But until the federal government decides to remove cannabis from Schedule 1 of the Controlled Substances Act, investors who want to participate in the multi-year wave of growth in the marijuana industry must accept an increased level of risk.

However, because GrowGen is a hydroponic and organic specialty gardening store, company-specific risk is reduced. And if the company can manage its debt and cash flow while aggressively growing its presence in the US hydroponics industry, the increased industry risk should be more than offset by the robust and industry-leading revenue growth.

At the time of publication, Bob Byrne had no positions in the stocks mentioned.

Story by ProactiveInvestors