IPO Edge Editor Jannarone: Hydrofarm is a smarter pot game, price target $70

Recent IPO Hydrofarm Holdings Group, Inc. is a rare opportunity to bet on cannabis growth through a company that “doesn’t touch the plant” and therefore does not face the regulatory issues faced by growers and other companies in the sector.

That’s according to IPO Edge Editor-in-Chief John Jannarone, who spoke to? Nicole Petallides of TD Ameritrade Network in an interview Monday afternoon. (Watch the full replay here).

Jannarone pointed out that the company’s recent acquisitions, along with healthy organic growth, should contribute $100 million to Ebitda next year. Assuming a multiple of 30, which is appropriate for a fast-growing company in the industry, the stock should be worth $70 a share, at its current price of about $48.

Hydrofarm continues to benefit from the shift towards cannabis legalization in the US, where several states have voted so far this year to legalize recreational marijuana. In a note to customers, UBS forecasts 34% year-over-year revenue growth for Hydrofarm between 2020 and 2023.

Hydroponic growing solutions can help farmers achieve much higher yields than with traditional soil-based practices. In addition to cannabis, other products, such as leafy greens, are increasingly grown using hydroponic techniques.

There is also plenty of room for further growth through acquisition. Stifel estimates that the company has $300 million in firepower for mergers and acquisitions.

Hydrofarm has a long track record, having been founded in 1977, long before cannabis legalization trends began. It also has strong leadership, including CEO Bill Toler, who has decades of experience leading consumer products companies.

Prior to joining Hydrofarm in 2019, Mr. Toler led Hostess Brands, Inc. by an impressive recovery. Hostess went public through a SPAC and returned to profitability under the leadership of Mr. Toler. Shares of Hostess now trade for more than $16 a share versus $10 a share when it merged with the SPAC.

Hydrofarm stocks moved about 50% off their peak earlier this year and may have come under technical pressure recently. The company has recently redeemed a large number of warrants, which may have contributed to selling pressure in its common stock.

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