During our last review of GrowGeneration Corp (OTCMKTS:GRWG) – which is available for readers here – we explored the hypothesis that the firm was on an expansionary strategy into the cannabis sector. Back then, their goal was to venture into medical marijuana and their strategy was mainly backed by the acquisition of one of the largest Michigan-based firms so as to boost their top line. The result for them was impressive as their venture into the segment indeed weighed in on their revenue base.
Currently, the firm is now considering a new venture: a venture into the Canadian marijuana space.
This option is meant to see them grow their hydroponics business within their state, ensuring that their expertise in the cultivation of cannabis is utilized fully. With the country having federally legalized recreational use of cannabis, the market has been ever-growing and their demand is currently in excess of the supply. As such, this provides the firm with an opportunity to actually venture in and carve out their niche in this young market.
With the above strategy in hand, analysis of the firm has shown their target price to be much higher than their current price – discussed later. As a result, the market has since shifted their view of the firm, with GRWG’s price rising significantly.
Over the past two weeks, the firm’s price has risen from lows of just above $3 to their current price of $4.12, a near 38% surge in their price. Furthermore, their volumes traded also spiked over the past one day. Readers can view the above price action in the chart below:
This is reminiscent, in the financial markets, of either a boost in the value proposition or a boost in the outlook. In this particular case, we postulate that the outlook provided by the analysts has been a key driver of the firm’s current price, a factor which we review over the course of this piece.
History of GRWG
Prior to going into the intricacies, let us first have a look at the history of the firm.
GRWG was founded back in 2014 and headquartered in Pueblo, Colorado. Its founders, Michael Salaman and Darren Lampert opted to specialize in hydroponic supply stores operations which would improve efficiency for professional cannabis growers across the United States.
Since then, the firm has grown their base significantly as they operate about 18 stores across different states. Their organic nutrients, lighting technology, as well as hydroponic equipment, has successfully been tested for both indoor and outdoor cultivation, yielding superior results in each case. As such, both commercial and home growers currently use their services and products.
As previously mentioned, there have been two issues pertaining to the firm which have arisen: their venture into the Canadian space as well as the firm’s analysis. Each of this is discussed below.
As of mid-October, there are plans by GRWG to venture into Canada and go public there.
This follows the formation of GrowGeneration Canada, the firm’s subsidiary. This firm will oversee the operations of GRWG in Canada. Specifically, the firm will take part in the acquisition of retail and wholesale equipment for the purpose of servicing the Canadian marijuana cultivator.
The eventual plans are to ensure the entity and its operations, as well as acquisitions, are financed outside of its parent’s arm. Currently, their target acquisitions stand at about $20 million with more activity expected going forward.
According to the firm’s Co-founder and CEO, Darren Lampert, the firm has been working to identify emerging markets specifically within the cannabis space for investment. With Canada being key among them, currently, their investment in the country is expected not only to grow their top line but also ensure that the firm’s brand is bettered. He also added:
“With over 11M sq. ft. of cultivation in place, plus laws that include home growing and micro-cultivation licenses, makes Canada a great new market opportunity for us. GrowGen Canada will seek to acquire profitable wholesale and retail hydroponic and grow supply businesses and access the Canadian public markets to finance these targeted acquisitions.”
With the business expected to kick off in Canada, the firm is expected to follow their current business model and market their product directly to their clients. As such, a strong marketing team is expected to soon set foot in Canada and kickstart their operations as the firm now fights to boost their market share.
The Zacks Effect
Based on the analysis by Steven Ralston, C.F.A, a Zacks Small-Cap Research Analyst, the firm’s target price was set to $7.4. In his analysis, he analyses the price to sales (P/S) multiple within the industry and settles for a P/S of 8.3 for GRWG thus providing the above price. His rationale is that firms operating within the early phases of the product life are better analyzed using sales – their ability to generate revenues.
This information lay the foundation on which the firm’s share price began to rise. Over time, it is expected that the management will put to practice the assumptions which went into the analysis thus bring to fruition the price stated.
Moreover, the firm’s price will be put to the test by the announcement of their financials on 9th November. Investors, however, seem hopeful that positive financials will be announced and that their capital gains as a result of price increments will continue to increase.
With the firm’s price expected to hit the analyst’s highs, investors have a lot to look forward to. As such, just like the analysts at Zacks, we remain bullish about GRWG.
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Disclosure: We have no position in GRWG and have not been compensated for this article.