GrowGeneration (GRWG 12.31%) has become one of the more disappointing marijuana stocks. The fact that it was a pick-and-shovel play on the cannabis industry did not insulate the stock from a drop of 95% from its 2021 high.
Nonetheless, the retail stock spiked 35% higher following the announcement of its third-quarter 2022 earnings. Now, investors have to decide whether this signifies a long-awaited comeback for the stock.
GrowGeneration’s wild ride
Investors got high on GrowGeneration stock early in 2020. It rose from penny stock levels to a high of around $68 per share in early 2021.
This occurred as demand spiked and same-store sales growth at GrowGeneration soared as high as 60% in the middle of 2021. The company responded by engaging in a rapid expansion of its footprint, particularly on the West Coast.
However, interest in cannabis quickly led to oversupply. Consequently, revenue growth hit a wall and then reversed, eventually making GrowGeneration a penny stock again.
Is Q3 earnings the turning point for GrowGeneration?
Admittedly, its third-quarter 2022 earnings report did not appear encouraging on the surface. Net sales of $71 million fell 39% from Q3 2021. Also, Q3 net losses came in at $7 million after the company earned $4 million in the year-ago quarter.
Yet, revenue came in $13 million higher than analysts had anticipated. Also, the company raised 2022 revenue guidance, taking it to the $270 million to $280 million range. GrowGeneration had previously estimated it would bring in $250 million to $275 million in revenue.
Such improvements seemed to boost GrowGeneration stock. Moreover, even after that increase, it sells at a price-to-sales (P/S) ratio of just above 1. This is well below the P/S ratio of 15 at the stock’s peak in early 2021 and appears to price in the struggles that the stock has faced. Moreover, the fact that it rallied on news that was merely less bad than anticipated could indicate the stock had become oversold.
Expansion possibilities and obstacles
Also, according to Grand View Research, the global cannabis industry will grow at a 26% compound annual growth rate through 2030.
GrowGeneration can still capitalize on that industry growth. It has expanded its presence east of the Rockies as more states loosen regulations. The retailer opened its first location in Mississippi earlier in the year and plans new stores in Missouri and New Jersey. Missouri just voted to legalize recreational cannabis within the state, while New Jersey began recreational sales in April. These factors should boost GrowGeneration’s expansion into those states.
Additionally, GrowGeneration plans to enter the indoor vertical farming market in 2023. The company owns a line of private-label products, and indoor vertical farming could expand the use of those fertilizers and farming solutions.
But despite GrowGeneration’s prospects, investors should not ignore the boom-and-bust nature of the cannabis industry. Moving from 60% same-store sales growth in mid-2021 to a 58% same-store sales decline in Q3 has undoubtedly made it difficult to drive investor returns.
That factor probably led to a profound change in its expansion plans. In 2021, GrowGeneration had planned to operate 100 locations by sometime in 2023. Instead, it reduced its store count from 62 in Q2 to 58 locations in Q3, an indication of the difficulty of managing its growth.
Furthermore, the federal government has shown no inclination to remove the Schedule I restrictions on cannabis. Hence, even in states where cannabis is legal, it remains illegal for marijuana to cross state lines. That factor could make it more difficult to clear inventories when the market becomes oversupplied.
Should I buy GrowGeneration?
GrowGeneration stock is not for the faint of heart, Still, the low P/S ratio and the signs of stabilization for GrowGeneration probably make now a good time for risk-tolerant investors to add shares. While nobody can guarantee that the stock will make you richer, the company appears well-positioned to benefit from industry expansion as states loosen restrictions on cannabis.
Admittedly, GrowGeneration and its investors should prepare for more boom-and-bust cycles. However, the low cost of this stock and the potential growth left in its industry should bode well for its future.
Will Healy has positions in GrowGeneration Corp and has the following options: long January 2023 $30 calls on GrowGeneration Corp. The Motley Fool has positions in and recommends GrowGeneration Corp. The Motley Fool has a disclosure policy.