After a 76% Decline in 2021, This Growth Stock Is Undervalued

2021 has been a challenging year for U.S. cannabis stocks. The Advisor Shares U.S. Cannabis ETF (NASDAQ: MSOS) is down 30% on the year and 52% from the 52-week high.

However, despite the carnage, there is a silver lining. Cannabis stocks are the most undervalued they have ever been.

Today I am going to share one of the most undervalued stocks from the group.

GrowGeneration Corp (NASDAQ: GRWG) is the largest retailer of cannabis growing equipment and materials in the U.S.

Think of this company as the Home Depot of the U.S. cannabis industry. This is the place where multi-million dollar grow operations go to buy supplies and materials. GrowGen also sells equipment and material to home growers.

The company offers more than 10,000 products in its store and online. Below you can see some products from the company’s website, including complete commercial growing systems, a commercial air pump, and a commercial water pump.

GrowGen has been expanding its national footprint in the last two years through a string of acquisitions and organic growth. Today the company owns 62 retail locations totaling 950,000 million square feet in 13 U.S. states.

The growth strategy is working. GrowGen has seen huge revenue gains in the last twelve months and that was recently on display with third-quarter results from early November.

Third-Quarter Revenue Jumped 105% from Last Year

  • Reported record third-quarter 2021 revenues of $116.0 million, versus $55.0 million in the same period last year.
  • Same-store sales at 25 locations open for the same period in 2020 and 2021 were $59.2 million in third-quarter 2021, versus $51.2 million for third quarter 2020, a 15.7% increase year over year.
  • Net income was $4.0 million, or $0.07 per share based on a basic share count of 58.5 million.

GrowGen is also seeing gains in its online business. E-commerce revenue came in at $10.5 million, up from $3.9 million.

Looking forward, we expect GrowGen to continue delivering impressive sales growth. GrowGen has been investing millions to expand and acquire competitors.

  • Opened two locations in Los Angeles County in September 2021.
  • Scheduled to open a sixth Oklahoma location in Ardmore in the first quarter of 2022.
  • In the process of building several additional locations which will serve as fulfillment centers, including 25,000 square feet in Phoenix, Arizona and the recently opened 58,000 square feet in Medley, Florida.

As you can see there is a lot of good news here. GrowGen is a growth stock. However, despite the good news, Growgen shares have been crushed in 2021. Shares are down 62% on the year and 76% from the 52-week high. Take a look at the 2021 chart below.

Why Did Shares Fall so Much?

There were two reasons shares have struggled in 2021.

  • GrowGen shares have been dragged down by weakness in the broader cannabis sector in 2021. The U.S. cannabis industry is booming in 2021 but cannabis stocks have had a terrible year because investors are frustrated with little progress on federal legalization.
  • GrowGen recently downgraded its full-year revenue target from $475 million to $435-$400 million. Despite the downgrade, analysts are still projecting 21% revenue growth next year.

After this decline in 2021, U.S. cannabis stocks are grossly undervalued relative to potential future growth rates. And from the broader cannabis sector, GrowGen is one of the most undervalued.

GrowGen has a price-to-sales ratio of 2.5. This is a discount to the S&P 500’s P/S ratio of 3 and a steep discount to how other growth sectors and growth stocks are valued. For example, Tesla (NASDAQ: TSLA) has a P/S ratio of 27 while sales are expected to grow 38% next year.

The Big Picture on GrowGen

GrowGen shares have plunged this year due to weakness in the broader cannabis sector and a small downgrade on revenue growth.

Here’s the good news – analysts still expect GrowGen to deliver impressive sales growth for the next few years and shares look undervalued relative to other growth stocks and sectors. Expect volatility in the short run.

In the long run, GrowGen shares should benefit from continued sales growth and a higher valuation as investors realize this growth story is intact.

About the Author

Michael Vodicka is an equity analyst with more than 20 years of experience trading and investing. His research has been featured in some of the industry’s most respected publications. He has been investing and leading investors in the cannabis sector since 2013.