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Why Growing-Your-Own Marijuana Makes More Sense

While there has been a lot of talk lately about the legalization of recreational marijuana in Colorado and Washington, and all of the wonderful tax revenues it could generate for the states when purchased through commercial retailers, there has been a surprising lack of discussion about bypassing the whole system and legally growing your own marijuana at home.

In this article, we will breakdown the costs of buying versus growing marijuana over a 10-year period for a “chronic user”, which is defined as someone who uses marijuana over 100 times per year. Before users in Colorado get all excited and rush down to their local dispensary, they really should do some basic math, especially since it could save them thousands of dollars each year.

With companies like GrowLife Inc. (PHOT) making commercial-grade growing equipment available to the public at a reasonable price, with features like remote monitoring for anyone with a smartphone, indoor growing is easier and more cost effective than ever.

Some Simple Math

The average cost of an ounce of marijuana (28.5 grams) at a Denver dispensary is approximately $400 per ounce, which equates to about $400 per month in expenses for a chronic user smoking about a gram a day. At this rate, such a user would purchase and consume $4,800 per year worth of marijuana, or a rather staggering $48,000 per decade. Those numbers assume that states will not also impose a hefty “sin” tax, as they have done with alcohol and tobacco.

Colorado’s new law permits home growers to plant up to six marijuana plants, with no limit to the size of the plants, just the quantity. Naturally, this means individuals will seek to grow the biggest, best plants that they can, as a fully mature plant can easily produce multiple ounces of marijuana per harvest with multiple harvests per year.

Using www.greners.com as an example store – as they have everything you would ever need to get started – the initial purchase of lights, nutrients, ppm monitors, and other basic equipment costs about $1,500. With approximately ~$550 in electrical costs associated with running a 1,000 watt lamp for 16 hours per day and the $50 a year in soil/growing mediums, the total cost for the first year would be approximately $2,100. Then, in the subsequent nine years, the home grower will still need to spend the $600 for electrical/growing mediums, but will not have to repurchase grow lights or any of the other major items.

The total cost associated with a 10-year, home growing program, is $7,500. Compared with the $48,000 in costs from buying from a dispensary, over $40,500 in savings is realized over the course of a decade. While recreational users may not be able to justify the upfront investment, growing indoor marijuana plants may save a chronic user approximately $3,375 per year, making it an easy decision to purchase grow-your-own equipment.

Significant Implications

The impact of legalized indoor growing on the marijuana market is difficult to project. While it’s fully legal to grow your own tobacco or make your own alcohol, few consumers have taken it upon themselves to undertake these activities simply to save money. Most home growers do it because they can control not only the quality, but also the nutrients used to foster growth and any pesticides used in the process. While this was an important black market concern, big tobacco companies already renting out warehouses in Colorado haven’t exactly been known for keeping harmful and unnecessary chemicals out of cigarettes.

With approximately 8,120,045 chronic marijuana users in the U.S., and 4% of the population living in recreationally legal states, the market for at-home growing technologies would equate to 324,800 users and a potential $324.8 million market, assuming each user purchased a $1,000 indoor hydroponics solution. Obviously, this market could grow significantly beyond non-chronic populations that could also realize savings. Essentially, using the cost breakdown from above, anyone who uses more than two ounces per year will save money by growing their own, making this segment exponentially larger.

With the sale of fertilizers, nutrients, and growing mediums to support these home growers, additional market opportunities exist for gardening suppliers like Scotts Miracle-Gro Co. (NYSE:SMG), as well as gardening retailers like The Home Depot Inc. (NYSE:HD) and Lowe’s Company Inc. (LOW). While these larger companies are able to get a piece of the industry in some respects, by providing basic materials that the outdoor gardener would use, there are limitations to the products that they sell which opens the door to smaller players.

Looking at Pure Plays

GrowLife Inc. (PHOT) represents one of the only public pure-plays on this sector, with it’s unique set of products. The company’s flagship Phototron unit is an all-in-one optimized growing kit that includes 1,000-watts of traditional lighting via multiple LED lights, timers and thermometers to ensure proper growing conditions, and a high-yield nutrient system.

With a market capitalization of just $18.4 million, the stock’s valuation could expand over the coming years, if marijuana legalization efforts continue to succeed in the U.S. Revenues are already growing at a rapid clip given the company’s fully legal product line-up, with third quarter revenues up 121% to more than $475,000 during the third quarter of 2012.

Looking ahead, capturing just 10% of the conservatively estimated $243.6 million market for indoor horticulture products would equate to $24.3 million in revenues per year, which would be roughly 12x its current $500,000 per quarter run rate. And again, these estimates could prove very conservative, if the marijuana legalization continues to gain traction.

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