Wall Street analysts often have some pretty outrageous predictions about where the prices of growth stocks are going, and 2023 is no exception. But even if their estimates are sometimes off by a huge amount, they're (usually) still based on sound business logic and an accounting of the headwinds and tailwinds that a company is going to face.
Nonetheless, there are a pair of cannabis growth stocks for which the performance that analysts expect is very unlikely to manifest anytime soon, as their estimates call for explosive rises in their share prices despite a bearish environment and slowing growth. On the other hand, if the analysts are right, a timely investment could make shareholders a lot richer in the near term.
Let's investigate each stock in a bit more detail to appreciate what's likely to happen.
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1. Green Thumb Industries
The analysts say on average that Green Thumb Industries' (GTBIF -4.12%) stock will jump from its price near $8 right now to reach around $19.81 this year, a rise of 147%. But even with its newly expanded retail footprint that's sufficient to service over 50% of the U.S. population, in Q4 it reported that its quarterly revenue of $259 million had actually shrunk by 1% compared to the prior three months, and only grown by 6.4% compared to a year prior.
And with management blaming price compression for subpar top-line growth, its margins are more likely to continue to be under pressure rather than they are to be expanding, so it's hard to see how its stock could skyrocket until the marijuana market becomes less flooded with low-cost cannabis.
Then there's the stock's valuation, which doesn't seem permissive to a massive run-up either. Green Thumb's stock has a price-to-sales (P/S) ratio of 2, which puts it at slightly less than the market's average P/S of 2.3, and significantly more expensive than nearly all the other major marijuana operators in North America. So it isn't looking dramatically underpriced in a way that would encourage its shares to squeeze upward by a huge amount.
None of the above is to suggest that Green Thumb stock is guaranteed to do poorly, just that there are headwinds that make the prospect of doing well much less likely. In due time, its ongoing shift from low-value-added products like dried buds to more valuable products like vaporizers could drive bottom-line growth that could power its stock to outperform, as could its brand-building efforts.
For now, this stock is a risky bet against the economic environment that it operates in, and the analysts likely aren't going to see their predictions come true this year.
2. Cresco Labs
Wall Street sees shares of Cresco Labs (CRLBF -3.25%) popping by 224.5%, taking it from the penny-stock-territory price of $1.69 to hit roughly $5.50 before the close of the year. Unfortunately, the picture is very much the same as it is with Green Thumb Industries, with an excess amount of marijuana on the market driving prices down, and the bear market scaring investors away from (perhaps only temporarily) unprofitable, low-growth businesses.
On that note, Cresco's annual revenue in 2022 only climbed by 3% year over year, topping $843 million, despite a whopping 37% increase in its volume of branded units sold compared to 2021. That's a pretty brutal disconnect between the additional number of products sold and the resulting amount of revenue growth, and it could suggest that even the company's upmarket brands have been forced to slash prices to stay competitive.
Moreover, management couldn't be any clearer about its expectations for 2023, with CEO Charles Bachtell stating, "As we look toward the months ahead, we don't expect the operating environment to get any easier." To navigate that difficult environment, the company will concentrate on advancing its profitable products and segments and maximizing its free cash flow (FCF). But it's unclear how even that would send its shares flying, as it isn't anywhere near being profitable overall, and it burned $37.9 million in cash during 2022.
Even if Cresco makes progress toward those objectives this year, the market's enthusiasm for the stock is likely to remain muted, given the fact that even management is trying to set expectations low. So it's likely that the analysts' estimates are a bit on the exuberant side with this stock too, at least for now.
Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Cresco Labs and Green Thumb Industries. The Motley Fool has a disclosure policy.
