William Blair & Company initiated research coverage of Hydrofarm Holdings Group, Inc. (HYFM $50.43). Hydrofarm is a leading branded hydroponics company with innovative product solutions and a comprehensive distribution platform serving the controlled environment agriculture (CEA) market.
Analyst Jon Andersen estimates the company to generate sales of $330 million in 2020 and $380 million in 2021. Hydrofarm sales have grown at a compound annual rate of 17% since 2005, but in 2020 growth has accelerated to 40%. Andersen attributes the acceleration to several factors including ongoing legalization trends, with new and existing adult-use cannabis states expanding operations, and internal actions such as the development of proprietary and preferred brands and commercial expansion.
“Hydrofarm sits at the intersection of two attractive market opportunities,” Andersen said. “These are the consumer-led movement toward the legalization of cannabis in the United States and its legalization in Canada, and evolution in CEA. The global wholesale CEA products market is estimated to be $8 billion. And a significant majority of the products Hydrofarm sells are ultimately used by growers of cannabis in North America, a market forecast to grow at a compound annual rate of 22% through 2024. Hydrofarm has a large branded product offering—spanning both durables and consumables—for all stages of hydroponic growing. Two-thirds of its sales are from consumables, creating a large base of repeat demand. In addition, 60% of its sales are proprietary and preferred brands, which command a large gross margin premium relative to distributed brands. Hydrofarm is focused on expanding the proprietary brand offering, adding distribution relationships with preferred brands, effectively serving commercial growers, and enhancing productivity.”
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