One of the challenges for cannabis investors is that it’s difficult to find exchange-listed stocks that benefit from industry growth in the U.S. But GrowGeneration (NASDAQ:GRWG) stock is an exception.

GrowGeneration operates retail hydroponic and organic gardening stores across the U.S. It’s thus almost literally a “picks and shovels” play on American cannabis growth. And at a time when U.S. multi-state operators remain prohibited from listing on U.S. exchanges, it is one of the most attractive domestic options.

To be sure, GRWG stock has priced in some of its potential. Even as cannabis names have struggled this year, GrowGeneration shares have nearly quadrupled year-to-date. But I don’t believe the rally is over. GrowGeneration has a lot more growth ahead, and the same likely is true of GrowGeneration stock.

Picks and Shovels

The term “picks and shovels” comes from the California gold rush of the 1840s and 1850s. As the story goes, some prospectors were successful. Most were not. But those who sold the prospectors the picks and shovels needed to mine for gold were consistent winners.

GrowGeneration is a similar play on the current “green rush.” The company operates 28 stores in 10 states, along with an e-commerce business. It offers everything from growing lights to greenhouses to trimming machines.

Much of the focus is on individual growers — but the company has a big professional business as well. Its trimming machines, for instance, sell for as much as $20,000.

The businesses legally growing cannabis in the U.S. need a place to buy their equipment and supplies. GrowGeneration is that place.

It has been a good business so far. Second-quarter results last month spiked GRWG stock for good reason. Revenue more than doubled year-over-year. And GrowGeneration already is profitable, with earnings per share of 7 cents in Q2, up from 4 cents the year before.

Strong performance should continue. Cannabis legalization in the U.S. continues to spread. It may accelerate as states look to plug budget holes created by the novel coronavirus pandemic. With its Q2 report, GrowGeneration initiated guidance for next year. The outlook implies revenue growth near 50%, with adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) rising even faster.

Some of that growth is coming from current stores. But GrowGeneration also will expand its footprint. The company is targeting 50 stores by next year — and over time this should be a nationwide business.

Not Just Cannabis

What is helpful for the bull case is that GRWG stock isn’t just a cannabis play.

After all, the company’s products can be used for any type of gardening. The pandemic has created a new base of potential customers picking up the practice as a way to manage this incredibly successful time. Higher demand for organic products and a desire for increased self-sufficiency only add to the secular growth story here.

Certainly, cannabis demand is likely the key driver going forward. Casual gardeners aren’t buying the highest-dollar, highest-margin equipment and supplies.

Still, this is a company with multiple customer bases and multiple tailwinds. And across the board, the impacts of the pandemic look beneficial long term. New gardeners aren’t going to disappear when normalcy returns. Again, cannabis legalization is going to continue (and I expect movement at the federal level at some point). Demographic trends even favor cannabis consumption.

All told, GrowGeneration has one of the best growth stories in retail, let alone cannabis.

A Reasonable Valuation for GRWG Stock

Given that GRWG is up 289% so far this year, some investors might expect that they would have to pay dearly for the growth story here. But that is not the case.

A pullback following a parabolic post-earnings rally certainly helps. But that aside, GrowGeneration is hardly an expensive stock. Analyst estimates for 2021 project 33 cents in EPS, implying a forward price-earnings multiple below 50x. Adjusted EBITDA guidance puts the forward enterprise value-EBITDA multiple around 25x.

Neither multiple necessarily is cheap. GRWG is not a value play. Still, this is a company that expects to grow at a roughly 50% clip next year. There is no real competition at scale. Home improvement superstores have neither the desire nor the expertise to move into cannabis. Acquisitions of smaller stores will continue, and as a result GrowGeneration’s footprint will expand.

For that kind of story, the current valuation is more than reasonable. And, again, investors betting on the U.S. cannabis market don’t have a ton of great options. But even if they did, GRWG stock still would be at or near the top of the list.

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