GrowGeneration (NASDAQ:GRWG) burst onto Wall Street’s radar in mid-August, when GRWG stock just about tripled in a week after the cannabis growing supplies retailer reported blowout second-quarter numbers which comprised 123% revenue growth.

Some pundits want to write off the big rally in GRWG as a pump-and-dump scheme with a sketchy management team.

But I think GrowGeneration stock is much more than that.

This is a unique “pick-and-shovels” pure-play on the U.S. cannabis boom, with compelling long-term upside potential to turn into a Home Depot (NYSE:HD) of sorts for the domestic cannabis growing industry. To that end, GRWG stock looks like a potential multi-bagger over the next few years.

Here’s a deeper look.

U.S. Cannabis Gold Rush

First, it’s important to understand that we are on the cusp of a U.S. cannabis gold rush, the likes of which will spark big growth in cannabis sales across all 50 states. This gold rush is inevitable because everything is shifting in favor of nationwide legalization and robust consumer adoption.

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Perception is shifting. About two-thirds of Americans support marijuana legalization today, according to a Pew Research poll, up from a third about a decade ago.

Demand is shifting. According to student surveys from Monitor the Future, more U.S. high school students smoke weed on a daily basis than drink alcohol on a daily basis – and it’s not even close (6.4% to 1.7% among seniors), with the gap widening at an accelerating pace. (That is, weed consumption has been steadily rising for 10-plus years, while alcohol consumption has been steadily falling).

Laws are shifting. Already 11 states plus Washington D.C. fully legalized cannabis. Many more legalized medical marijuana. Only eight states representing less than 10% of the U.S. population have laws which strictly prohibit all cannabis. And, many of those states were on track to strike those antiquated laws in 2020 before the novel coronavirus halted legislative meetings.

The writing is on the wall here.

Thanks to shifting perception, demand and laws, nationwide legalization of cannabis in the U.S. is coming soon – and when it does, it will spark a cannabis gold rush like we’ve never seen before.

Well, we have actually seen it before, back in 1849 during the actual Gold Rush.

And during that Gold Rush, the people who sold picks and shovels to the gold miners – like Levi Strauss – made out like bandits. The same will be true during the cannabis gold rush, and that’s great news for GrowGeneration and GRWG stock.

Consolidating a Fragmented Industry

Growing cannabis is not a straightforward, easy process. Most of the time, it requires something called hydroponics, which is basically just a soil-free way of growing cannabis (and therefore, an easier, more scalable, cheaper and more hassle-free way of growing pot).

Amid the cannabis gold rush of the 2020s, demand for hydroponics growing supplies will soar as the number of cannabis growers. The volume of cannabis they are growing will soar, too, amid surging demand and easing regulation.

But, in its current state, the hydroponics industry is not ready for this surge.

There are about 1,000 hydroponics stores in the U.S. The market is highly fragmented. There are no big brands. There’s zero consistency across markets. And online and omni-channel capabilities are limited.

That’s where GrowGeneration comes in.

Founded in 2014 in Colorado, the $690 million specialty hydroponics retail chain is trying to consolidate, optimize and modernize the cannabis supplies market, and ultimately turn into a modern, national go-to convenience store for cannabis growers. In other words, something like the Home Depot for cannabis growing materials.

Sounds ambitious. Is is possible? I think so.

And if the company pulls it off, the potential upside in GRWG stock is enormous.

History of Success

GrowGeneration is more than an idea. The company has a history of robust success in scaling its “convenience store of cannabis growing” concept across multiple states.

GrowGeneration started with one store in Colorado in 2014. Today, the company operates 28 organic garden centers across 10 states, which actually makes it the largest cross-state organic garden center store operator in the U.S.

Importantly, this geographic expansion has been met with robust demand.

On 38% store growth in 2018, GrowGeneration’s sales rose 107%, implying huge average sales per store growth. In 2019, 39% store growth turned into 176% revenue growth, implying even more average sales per store growth. This year, management projects to do about 120% revenue growth on what will probably be sub-40% store growth, yet again implying significant average sales per store growth.

Both the number of stores and the amount of sales GrowGeneration is doing in each one of its stores are soaring.

So are profit margins, as GrowGeneration has benefited from economies of scale and adjusted EBITDA margins have swung from a loss in 2017, to a projected 10% in 2020.

Strong Growth Drivers

Going forward, GrowGeneration has multiple strong growth drivers which should sustain the company’s current upward trajectory.

First, there’s geographic expansion. Most of GrowGeneration’s stores are in advanced, developed cannabis markets like California, Colorado and Michigan. As laws evolve and marijuana becomes more legal and less taboo in other states, GrowGeneration will expand into new states. Indeed, at just 28 stores today versus a hydroponics market of 1,000 stores in America, GrowGeneration has plenty of room to sustain big unit growth for a lot longer.

Second, there’s online and omni-channel. Management recently launched a robust e-commerce platform at GrowGen.Pro and is connecting that online store with physical stores to build out seamless and expansive omni-channel capabilities (like buy-online, pick-up in-store). These are all firsts for the antiquated hydroponics industry, and therefore, GrowGeneration has a compelling opportunity to rapidly scale its modern, omni-channel sales model.

Third, there’s private label. In late 2019, management rolled out its private-label brand Sunleaves. The hope is that a private-label brand across all of its stores will create unparalleled product and inventory consistency across markets, improve customer loyalty and boost margins.

So far, it’s working. Less than a year old, the Sunleaves brand is doing about $100,000 in sales per month, and helping push up gross margins.

As GrowGeneration continues these efforts, the company should sustain robust revenue and profit growth in the U.S. cannabis gold rush of the 2020s.

Tons of Upside Potential for GRWG Stock

If management can successfully scale GrowGeneration into a national brand, the potential upside in GRWG stock is enormous.

We have a $690 million company today. Assuming the company can grow to ~200 stores by the end of the decade, maintain solid unit volumes and expand profit margins thanks to private-label sales, my numbers say this could easily be a $1.4 billion revenue business with 15%+ EBITDA margins and $175 million in net profits.

Home improvement retail stocks typically trade around 20 times forward earnings. A 20 times multiple on $175 million implies a potential future valuation for GrowGeneration of $3.5 billion.

That’s up five times from today’s levels. And that doesn’t include any expansion into Canada or overseas – which could easily double or triple the size of the business.

To that end, GRWG stock is a compelling “picks-and-shovels” pure-play on the cannabis gold rush, with potentially enormous upside.

Bottom Line on GRWG

I like GrowGeneration stock long-term as a speculative high-risk, high-reward play on the U.S. cannabis industry.

To be sure, this one isn’t for your lunch money. But the risk-reward profile is favorable, and therefore, GRWG stock is a moonshot investment worth making.