Green Thumb Earnings: Cutting Valuation as Continued Price Compression Weighs on Growth Trajectory

We were disappointed by no-moat Green Thumb’s GTII second-quarter revenue, which grew just 2% sequentially and declined 1% year over year to $242 million. The company’s six new stores opened during the quarter (now 84 total stores) was offset by same-store sales declining 3%. This fits with the price compression management cited that continues to weigh on top line growth.

We’ve cut our revenue forecast, with 10-year average annual growth down to 13% from 18%. Given the company has yet to generate positive free cash flow, changes in our revenue outlook have significant changes to our valuation. We reduced our fair value estimates to $28 and CAD 38 per share, down from $35 and CAD 47 per share, respectively. Shares are well undervalued, as we think the market remains overly focused on the lack of progress around easing federal prohibition.

On the positive side, we are pleased to see Green Thumb’s ability to maintain profitability despite pricing pressure. Gross margin and adjusted EBITDA margin of 50% and 30%, respectively, were largely stable from the prior year quarter. Partially offsetting the cut to our top line forecast, we’ve reduced our overhead cost estimates, as Green Thumb has done a better job cutting expenses than we anticipated. We now forecast selling, general, and administrative costs as a percentage of revenue to reach 27% by the end of the decade, down from our prior forecast of 35%.

We reiterate our Very High Uncertainty Rating for Green Thumb. Given how new legal cannabis is, there is significant uncertainty around potential outcomes. Still, we think the market continues to overemphasize the lack of progress on easing federal prohibition and mistake slower-than-expected growth as signs the overall market potential has changed. Compared with the massive expectations priced in a few years ago, we now think investors have swung too far the other way. But like growing a plant from seed to harvest, an investment in cannabis might require some patience.