After trading near all-time highs in 2021, cannabis stocks have trailed the broader markets by a wide margin in the last three years. One such cannabis penny stock is GrowGeneration (GRWG), which trades 97% below all-time highs.
Colorado-based GrowGeneration develops, markets, distributes, and retails products for indoor and outdoor hydroponic and organic gardening, in addition to customized storage solutions. It sells several products, including nutrients, additives, and environmental control systems. In fact, GrowGeneration is among the largest retailers and distributors of specialty hydroponic and organic gardening products in the U.S.
With a market cap of $135 million, GrowGeneration might soon gain momentum, given that the company’s management is buying shares of the beaten-down marijuana stock. Let’s dive deeper to see if you should consider buying this cannabis penny stock.
A Focus on Cost Savings
According to recent SEC filings, GrowGeneration insiders - including President Michael Salaman and CEO Darren Lampert - have collectively purchased more than 300,000 shares of the company this month, worth close to $600,000 in total. Generally, management buys shares when they feel that their company's stock is undervalued and on the cusp of a turnaround.
Recently, the company announced a comprehensive restructuring plan focusing on long-term profitability and advancing growth initiatives in key areas such as e-commerce, proprietary brands, and B2B. The plan includes improving inventory management and other operational activities, which might result in cost savings of $12 million in the next year.
For example, GrowGeneration aims to increase the revenue share of its proprietary brands to account for 35% of sales by the end of 2025. It will also add 50 new products to its proprietary brands lineup in the next 12 months.
Moreover, the company disclosed plans to launch a B2B e-commerce portal in Q4 of 2024, as it migrates transactional activity from brick-and-mortar stores to a digital platform. It would then implement a fulfillment strategy allowing commercial customers to shop online and access products at existing warehouse-style stores for pickup.
Recently, GrowGeneration stated that it would right-size its national retail footprint and close 19 underperforming stores, seven of which closed in the first six months of 2024. Finally, it will reorganize its sales and marketing activities to reduce expenses by rationalizing SKU count and enhancing strategic vendor partnerships to improve freight expense recovery.
How Did Grow Generation Perform in Q2 of 2024?
GrowGeneration increased sales in Q2 of 2024 by 11.8% to $53.5 million. Its proprietary brand sales as a percentage of cultivation and gardening net sales rose to 21.5%, compared to 16.7% in the year-ago period.
During the three-month period, GrowGeneration’s profit margin expanded by 110 basis points to 26.9%, while its adjusted EBITDA loss narrowed by $600,000 to $1.1 million. It ended the June quarter with $56 million in cash, and no debt.
What's the Target Price for GrowGeneration Stock?
GrowGeneration remains a high-risk investment, as it is still unprofitable. Given that its cash balance will be used to support its unprofitable operations, it will soon have to raise capital. In the event that the company raises equity capital, existing shareholder wealth will be diluted, driving the stock lower.
Out of the five analysts covering GrowGeneration stock, two recommend a “strong buy,” and three recommend a “hold.”
Wall Street has a mean target price of $3, which is about 34% higher than GRWG's current trading price.
On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
