Why GrowGeneration Stock Is Plunging Today

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What happened

Shares of GrowGeneration (NASDAQ:GRWG) were plunging 18.2% as of 11:10 a.m. EDT on Thursday. The big decline came after the specialty hydroponic and organic garden retailer reported its second-quarter results before the market opened.

So what

GrowGeneration announced Q2 revenue of $125.9 million. This nearly tripled the company’s revenue of $43.5 million in the prior-year period. It also handily beat analysts’ consensus revenue estimate of $111.7 million.

The company posted earnings per share (EPS) of $0.11. Although this result was better than the EPS of $0.06 in the same quarter of 2020, it fell a little short of analysts’ average estimate of $0.12.

Cannabis leaf on top of a $100 bill partially covering Ben Franklin's face.

Image source: Getty Images.

Why did the ancillary cannabis stock fall so heavily on such a small earnings miss? Probably because of Wall Street concerns that GrowGeneration’s growth could slow in the second half of this year.

That might seem like a misplaced fear given that GrowGeneration raised its full-year revenue guidance to $475 million from its previous forecast of $455 million. The company generated sales of $215.9 million in the first half of 2021. Its outlook projects higher revenue of $259.1 million in the second half of the year. However, GrowGeneration’s growth rate will slow somewhat.

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For most stocks, strong growth would be enough to satisfy investors even with a slowing growth rate. However, GrowGeneration’s shares currently trade at nearly 88 times expected earnings. The stock is priced for perfection at that lofty valuation. Anything that raises concerns — including a slowing growth rate — can (and just did) lead to a pullback.

Now what

GrowGeneration could win back investors’ favor by delivering stronger-than-expected growth in future quarters. Probably the best way for the company to achieve this is to make more acquisitions. GrowGeneration acquired two stores in the second quarter and will add even more thanks to agreements announced in July.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.



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