Green Thumb Industries just reported earnings and the numbers beat on revenue and earnings. I wanted to break down the financials and see how the numbers added up and where the potential stock price will be. In short, there is upside potential. But, from a conservative standpoint, $GTBIF may be about where it needs to be.
I am going to present the conservative argument for an upside increase in stock price. Truth is, I believe there can be a lot more. Green Thumb is just entering into certain markets and will likely expand in these markets, such as the new store in Pasadena, CA. These initial footprints are the starting point of a large increase in revenue growth. Now that they are printing consecutive GAAP profitability quarters, I think the stock could move up significantly.
Here is a look at the latest chart action on $GTBIF:
$GTBIF has pushed higher since the latest cannabis price drops through late February and into March. But, this rebound seems like it might have legs.
Green Thumb Industries Revenues
I am showing Green Thumb Industries’ revenues along with a future projection. Here is the latest data:
Sequentially, Green Thumb has printed continuously growing revenues. This comes from both organic, YoY growth, and new store openings. The latest revenue increase was ~12.5% QoQ. The industry itself is continually increasing and a company keeping up with this kind of growth is what you would be looking for; not all cannabis companies are keeping pace.
The state of California is printing about ~$4B in revenues total for cannabis. The market could be as high as ~$15B within about 5 – 7 years’ time. Green Thumb Industries just opened a dispensary in Pasadena, CA, as I mentioned. That means Green Thumb now has a footprint in one of the biggest states in the union. Pasadena, in Southern California, is just the start; they will open more dispensaries.
This is a big potential for revenue growth. And, with economies-of-scale, and the other impressive metrics that Green Thumb is printing, they will only expand upon their initial success throughout the company.
Future Revenue Projections
I have put together a projection of future revenues for the next 4 quarters:
I used 7.5% growth QoQ to project this chart. I believe that is ultra-conservative; Green Thumb will likely outpace that. I believe total revenue for the next four quarters will be $850M. Keep in mind, they just posted 12.5% and they just opened a few more dispensaries as well as began establishing themselves in a few other states. Green Thumb is going to be able to sell products in other dispensaries in these states so, there are no real limitations.
But, should Green Thumb outpace the $850M and hit $1B, this will add significantly to the bottom line. The reason is simple: any margin increases in output will add more significantly to the bottom line. Once you pay the rent on a building, then any profits from, say 1,000 units versus 850 units go towards the bottom line. There are other costs added to that additional production, of course. The added output just means a company will be far more profitable on a cost-basis ratio.
Mind you, we have not been given any guidance by management. So, these projections are all mine. But, considering the past growth, the increase in footprint, and the growth potential of some of the locations that are switching to adult-use, there is a lot of upside potential.
Green Thumb Gross Margins
I’m a number guy and I love breaking down all of the pieces of the puzzle to any company. Revenues are the first piece, margins are the second:
Green Thumb has been consistently increasing its gross margins via keeping cost-of-goods sold lower while maintaining price control, the two methods. The stated goal is to maintain a +50% level which they have achieved over the past year.
But, after having scrutinized some 350 cannabis companies, I can say that the very best come in about 60% – 65% on gross margins. On some level, this is a natural progression that as output increases, cost-of-goods sold does not move upwards at the same pace.
Also, what I have found is that the higher range that I mentioned, the 60% – 65%, mostly applies to dispensaries. Growers see far more variability and yields vary. Because of this, margins tend to be about 10% lower than that of a dispensary. Green Thumb does have a mix of grow and dispensary, so there should be some kind of balance in its gross margins.
Also, Green Thumb is just opening up some dispensaries and it does take a small amount of time to get going with achieving optimal margins. For now, I am expecting elevated margins, but not the best that Green Thumb can achieve in the future.
Future Gross Margins
I have projected the next few quarter’s gross margins and will be projecting costs as well as earnings. I feel comfortable with these levels of margins on a future basis. They are a natural progression along with revenue increases and economies-of-scale.
Green Thumb Industries Operating Efficiencies
Total operating expenses are those expenses not associated with the immediate input of producing a product. They are the next layer of expenses and Green Thumb Industries has a firm grip on this metric:
A company with a lower operating efficiency, total operating costs over total revenue, is said to be doing better than a company with a higher number. Green Thumb Industries is a company that is firing on all cylinders. The best companies I have seen usually hit between 25% – 30% with the majority hitting ~35%; Green Thumb is a solidly efficient company. You will not see much improvement here.
Green Thumb Industries Projected Cost Efficiencies
I used this same metric to project operating profits:
Not having run-away costs will go far in adding to the bottom line.
Green Thumb Industries Future Earnings
When you look at revenues that could be either $850M – $1B, and you put gross margins at 60% with operating costs at 30%, you are looking at $250M – $300M in operating profits. Then, profits from continuing operations should bring net earnings down to a range of $80M – 100M for the next year.
Green Thumb Industries Future Projections
The key mix here is looking at revenue growth and Green Thumb’s ability to maintain very impressive gross margins while simultaneously keeping costs in check. There is some room for improvement with margins. I would be looking for gross margins to hit above 60% in about 2 – 3 quarters. At the same time, I am looking for operating costs to remain contained and because of that total cost metrics should be continuously contained.
The real variability then becomes what will gross revenues come in at?
I believe two things: first, revenues will probably outpace what I am predicting. And, second, the earnings multiple is likely to be much greater than my future projections.
I have projected all of a 7.5% QoQ revenue growth rate. I think Green Thumb will do better than that. If they do, then my projections are conservative and $GTBIF will move much higher at a more rapid pace. I have already stated that I think they may very well hit $1B in revenues this year, about 20% more than my projection.
Future Earnings Multiple
But, it is the earnings multiple that I also see as being conservative. The S&P 500 hits about 35x future earnings. Revenue growth rates are on average 3.5% annually for the S&P 500. But, Green Thumb is a cannabis stock that is printing far higher revenue growth. Therefore, you cannot use the same 35x future earnings multiple because of the growth rate in both revenues and earnings.
What do you use?
I have seen a few numbers floating around that some investors pick for their future earnings multiple, and I believe that a 50x multiple is too low. Also, I should think that 100x is modest but, that you could go higher depending upon how much more Green Thumb grows its revenues. I am going to use a 100x multiple. But, I am also going to use both the $850M and $1B revenue levels and the earnings derived from each of these.
Given those kinds of earnings multiples, with 185M shares outstanding, Green Thumb Industries should be trading at $43.00 – $54.00 per share. $GTBIF should be pushing higher by as much as 50% from its current price.
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