Small, volatile stocks in emerging industries can sometimes have the right stuff to help make investors into millionaires, and Green Thumb Industries (GTBIF 0.78%) could potentially fit the bill. The multi-state operator's marijuana revenue is booming despite a few headwinds. With the prospect of legalization still on the horizon, shareholders could one day see the benefit of a massive and one-time catalyst.
But experiencing that rosy picture is not guaranteed. Like most supposed millionaire-maker stocks, there are risks that could easily derail the party before it even starts. Let's examine this issue realistically so that you'll have an accurate view of what this stock could (and can't) do for you.
What would need to happen
For Green Thumb to be effective at helping investors become millionaires, it would need to fulfill a few conditions, including having a long runway for growth, a credible chance of actually capturing that growth consistently, and a competitive advantage that would prevent it from losing market share over the long term.
On the basis of that first item, it looks to be in good shape. Today, the company competes in a handful of state-level markets in the U.S., selling cannabis from its retail locations and distributing it to its partners, ultimately giving it access to around half of the country's adults. Eventually, if cannabis is legalized at the national level, Statista thinks that the U.S. market for legal cannabis could be as large as $40 billion in 2024 alone. Therefore, it's undeniable that Green Thumb has a large market to penetrate over time.
It might be possible for the business to take a significant share of the market, too, though it won't happen overnight. While Green Thumb's trailing-12-month revenue is more than $1 billion today, it grew by 60% over the last three years. It's clearly and consistently doing something right in terms of finding a fit between its target customers and its product selection.
The trouble is, since the start of 2023, its pace of growth has slowed significantly. That slowdown is likely a result of the legal adult-use segment of the U.S. marijuana market becoming more saturated with supply rather than any flaw in the company's own strategy. The slowdown is probably temporary. So while the current state of affairs is not exactly one of mouth-watering growth in the near term, there do not appear to be any hard barriers preventing Green Thumb from gaining traction in the market.
Regarding its ability to develop a competitive advantage, the very issue is a bit difficult to pin down. With so many new brands and new types of products entering the cannabis landscape, and with so many different competitors looking to get their slice of the pie, there does not yet currently appear to be any marijuana business with a strong competitive advantage in the form of branding. Nor have any player's claims about competitive advantages in low-cost or vertically integrated operations led to persistently profitable operations.
Nonetheless, the industry is still in its adolescence, and people will likely develop strong preferences for certain products or brands over time. There isn't anything ruling out Green Thumb's present or future offerings being the ones that consumers crave even if there isn't much evidence of widespread brand loyalty yet.
Likewise, cost advantages could well develop over the coming years, but on the basis of its operating margin falling in the last three years and its cost of goods sold (COGS) as a percentage of revenue rising in the same period, this company doesn't have them yet.
Don't forget to take a dose of realism
So far, we've established that Green Thumb is not inherently incapable of driving significant growth. Now, it's time to talk about what's likely to happen rather than what's merely possible.
With this stock, it probably isn't plausible for a relatively small investment on the order of $1,000 to multiply in value and eventually be worth close to $1 million. As the company's market cap is above $3 billion today, the amount it would need to grow to be a millionaire-maker is simply unrealistic for a company that's primarily engaged in cultivating, manufacturing, and selling physical products to consumers. That's doubly true under the present circumstances when it isn't even durably profitable, and its valuation is already looking stretched in comparison to its peers.
Still, under the right set of conditions, which could come about within the next few years, Green Thumb could still be a significant contributor to your portfolio. While such an investment is not without plenty of risks, as most cannabis stocks are on the volatile side, it's true that the legalization of marijuana in the U.S. entails a massive potential opportunity. Dabble in buying shares if you dare, but don't think of the purchase as being a lottery ticket.
