Is Green Thumb Stock Oversold? The Case for 100% Upside.
Key Points
Analysts' price targets for Green Thumb Industries are more than double its current price.
A newly emerged catalyst could help bridge the valuation gap.
It all has to do with recent changes to a brand licensing deal.
- 10 stocks we like better than Green Thumb Industries ›
Marijuana stocks have continued to struggle, and Green Thumb Industries (OTC: GTBIF) is no exception. Shares in the cannabis products manufacturer and retailer had fallen 10% year to date as of market close April 21. Many factors are to blame, most notably a further lack of progress in reforming or repealing U.S. federal restrictions on marijuana.
However, analysts remain bullish on Green Thumb. The average analyst price target for the stock is $18.50 per share as I write this, more than 100% above the present price. While analysts may be bullish in general due to the prospect of marijuana law reform, a different catalyst has recently emerged that may help bridge the gap between trading price and price target.
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Green Thumb Industries at a glance
Based in Chicago, Green Thumb is a vertically integrated cannabis company operating within the United States. Besides operating 113 retail Rise Dispensary locations across 14 U.S. states, the company also operates 20 manufacturing facilities.
At these facilities, Green Thumb produces products sold under a plethora of consumer brands. Having long reached scale, the company has been profitable for several years, reporting positive earnings under generally accepted accounting principles (GAAP) since 2019. More recently, annual earnings have been trending upward. Better yet, a recent catalyst could have a tremendous impact on earnings growth.
The new catalyst
Green Thumb licenses several of its core brands from Rythm (NASDAQ: RYM) and owns just under 50% of that company. Previously, Green Thumb Industries was paying revenue-based royalties on Rythm brands. However, it was announced on April 1 that the company will start paying a flat $70 million in licensing fees per year, with this figure rising only in line with the Consumer Price Index (CPI).
This suggests stronger incremental earnings growth as Green Thumb's top line continues to expand. Although revenue rose by just 3.3% last year, flat-fee licensing could mean most of this incremental revenue falls to the bottom line in subsequent earnings reports. Add the potential for further progress on legalization, and a possible road to doubling for this speculative growth stock becomes a whole lot clearer.
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Thomas Niel has no position in any of the stocks mentioned. The Motley Fool recommends Green Thumb Industries. The Motley Fool has a disclosure policy.
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