Better Marijuana Stock: Green Thumb Industries vs. GrowGeneration

If you want proof that the U.S. cannabis market is booming, just look at Green Thumb Industries (OTC: GTBIF) and GrowGeneration (NASDAQ: GRWG). Both companies reported sizzling sales growth in their latest quarterly updates. Both stocks have soared so far this year, with Green Thumb's shares up more than 40% and GrowGeneration's share price more than quadrupling.

Which of these marijuana stocks is the better pick now? Here's how Green Thumb and GrowGeneration stack up against each other.

A large cannabis leaf in a shopping cart.

Image source: Getty Images.

The case for Green Thumb Industries

Green Thumb Industries ranks as one of the largest multistate cannabis operators in the U.S. The company operates two retail cannabis chains, Rise and Essence. These retail stores feature several of Green Thumb's own cannabis brands, including Beboe and Dogwalkers. The company currently has operations in 12 states.

Sales growth has seemingly come easily for Green Thumb. The cannabis operator generated revenue of $119.6 million in the second quarter of 2020, a 16.6% quarter-over-quarter increase and a 167.5% year-over-year jump. Much of the company's growth has come in its home state of Illinois, where recreational marijuana sales became legal this year.

Green Thumb should be able to continue growing in Illinois as the state's cannabis market matures. It also has solid growth opportunities in several other markets, notably including Pennsylvania and Nevada.

The clearest path to growth for Green Thumb is simply to open more retail cannabis stores. The company currently operates 48 stores, but has licenses for twice that number. In addition, Green Thumb could expand into new states -- especially as other large states legalize recreational marijuana.

Probably the biggest downside for Green Thumb right now is that it remains unprofitable. However, the company is generating positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). It also reported a solid cash position of $82.9 million as of June 30, 2020.

The case for GrowGeneration

GrowGeneration operates the largest chain of specialty hydroponic and organic garden centers in the U.S. It especially targets customers in the cannabis industry. GrowGeneration ranked as the top-performing cannabis stock in the first half of 2020 and has built on its momentum since then. 

The specialty retailer delivered its 10th consecutive quarter of record revenue in Q2, reporting sales of $43.5 million -- up 123% year over year. Acquisitions accounted for some of this growth, but GrowGeneration's same-store sales also jumped 49%. 

GrowGeneration currently operates 28 retail stores in 10 states. It plans to expand to 50 stores in 15 states by the end of next year. Mergers and acquisitions will be key to achieving this goal.

The company also has other ways to boost sales. In particular, GrowGeneration has launched its own private-label brands that include additives, nutrients, LED lights, and soils.

Unlike Green Thumb, GrowGeneration is already profitable, with its earnings more than doubling year over year in Q2 to $2.6 million. The company only had $14.8 million in cash as of June 30, 2020. However, GrowGeneration raised $48.3 million in gross proceeds in a secondary offering in July. 

Better marijuana stock?

There's one area in which we haven't compared these two stocks -- valuation. GrowGeneration's enterprise value-to-EBITDA multiple is nearly 225. That's nearly six times higher than Green Thumb's EV-to-EBITDA of 38. This valuation discrepancy is partially due to GrowGeneration being able to list its shares on a major U.S. stock exchange. Green Thumb can't do so while marijuana is illegal at the federal level in the U.S.

I think that Green Thumb's much lower valuation makes it the better marijuana stock right now. If the U.S. legalizes marijuana (or at least recognizes the rights of states to set their own cannabis laws), my view is that Green Thumb would be a bigger winner than GrowGeneration. However, I like the long-term growth prospects for both of these stocks regardless of what happens with federal cannabis legalization.

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Keith Speights has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Green Thumb Industries and GrowGeneration. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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