While artificial intelligence (AI) is one area where investors are looking for rapid growth, other industries can be just as beneficial in the long run.
Cannabis is one such hypergrowth industry, with rapid expansion driven by increased legalization and social acceptance in various regions. According to experts, the global cannabis market is expected to grow at a 34% compound annual growth rate to $444.3 billion by 2030.
Cannabis stocks can be highly volatile, with prices fluctuating significantly in response to news, regulatory changes, and market sentiment. The only thing holding U.S. cannabis companies back from reaching their full potential is federal legalization.
However, the Biden administration recently announced that marijuana will be reclassified from a Schedule 1 to a Schedule 3 drug. While reclassification is not the same as legalization, it will open up many new opportunities for cannabis companies, boosting profits.
Cannabis stocks can be a good investment for those with a high-risk appetite and a long-term investment horizon to reap potentially greater rewards. However, not all cannabis stocks are created equal.
Here are two cannabis stocks that I believe will make good long-term investments, despite the bumpy ride.
Green Thumb Industries Stock
Despite the challenges of the cannabis industry, Green Thumb Industries (GTI) (GTBIF) has piqued Wall Street's interest by being profitable every year since 2020 under GAAP. Its revenue has risen from $216 million in 2019 to $1.5 billion by 2023.
Illinois-based Green Thumb is a vertically integrated cannabis company, which means it controls every aspect of its production and distribution process. It operates 93 stores in 14 U.S. markets under the retail name Rise, offering a wide range of cannabis products under the brands Beboe, Dogwalkers, incredibles, RHYTHM, and more.
Green Thumb’s shares have risen 4.7% YTD, compared to the S&P 500 Index’s ($SPX) gain of 13.5%.
In the first quarter of 2024, net revenue rose 11% to $276 million. GAAP net income of $0.13 per share increased by 225% over the previous year's quarter.
The company targets limited license markets, which award licenses to specific cannabis operators, allowing it to strengthen its brand presence. Green Thumb also expanded steadily without jeopardizing its balance sheet. Its low debt-to-equity ratio of 0.33 demonstrates this, reflecting the company's careful debt management practices.
Management stated on the Q1 earnings call that, despite pricing pressures, the company is focused on scaling the business through retail store expansion and investing in quality products and premium brand experiences, all while managing the balance sheet. The company's cash and cash equivalents totaled $223.9 million at the end of the quarter.
Analysts covering GTI predict revenue growth of 6.6% in 2024 and 7.4% in 2025. Furthermore, analysts expect Green Thumb to be profitable in 2024 and 2025.
Wall Street rates Green Thumb stock as a "strong buy." Ten of the twelve analysts who cover the stock rate call it a "strong buy," while two call it a "moderate buy."
The average analyst target price of $19.63 implies a potential 64.5% increase in the next 12 months. Furthermore, its Street-high estimate of $34.75 implies that the stock could rise 190.8% from current levels.
Cresco Labs Stock
Like GTI, Illinois-based Cresco Labs (CRLBF) is also a vertically integrated cannabis company. Cresco Labs has rapidly expanded its footprint across the country with 72 stores, becoming a significant player in the burgeoning cannabis industry.
The lack of federal legalization continues to weigh on the cannabis market, resulting in oversaturation. As a result, in Cresco's recent first quarter, revenue came in flat year-over-year at $184 million. However, adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) grew 82% year over year to $53 million. Net loss narrowed by a huge margin to $2 million compared to $27 million in the year-ago quarter.
Cresco’s shares have gained 27.6% YTD, compared to the broader market.
Cresco Labs has established a strong presence in key cannabis markets across the country. It offers a diverse range of medical and recreational cannabis products. Its flagship brands, including Cresco, Remedi, Mindy's, Good News, and High Supply, have built a loyal customer base, which is critical for any consumer goods business.
Cresco’s debt-to-equity ratio of 1.24 implies its heavy reliance on debt. At the end of Q1, it had cash and cash equivalents totaling $125 million and a senior secured term loan debt of $387 million. Cresco generated $33 million in free cash flow in the quarter. Consistent profits and free cash flow should help the company manage its debt levels.
For the full year 2024, analysts forecast that Cresco’s revenue will dip by 3.3% to $745.3 million, before rising by 6.4% to $793.1 million in 2025.
Overall, Wall Street remains bullish about Cresco's long-term potential, and analysts have rated it a "strong buy” overall. Of the 10 analysts covering CRLBF, seven have a “strong buy” recommendation, one has a “moderate buy” rating, and two suggest a “hold.”
Analysts’ average price target of $4.37 represents a potential upside of about 152.6% from current levels. Furthermore, its high target price of $14.32 suggests the stock has the potential to rally by 727%.
