Sundial Growers (NASDAQ:SNDL) is enjoying a moment in the sun. SNDL stock is up more than 100% in the past five days. Still, in the bigger picture, Sundial has been a disappointment. Over the past year, shares fell from $3 to as low as 14 cents before the recent rally.
However, shares are surging now. Has something material changed with Sundial’s business in particular? No, it wouldn’t appear so. Rather, traders are gravitating to the marijuana stocks because the U.S. House of Representatives is set to vote on legalizing marijuana this week. That’d obviously be a huge and historic vote if it is passed, and people are understandably excited.
Before you buy into the excitement, however, do remember that the Republicans control the Senate and are decidedly less likely to go along with this legalization effort. Also, President Donald Trump would probably not act on a bill even if it made it through the Senate, so little would happen until President-elect Joe Biden takes office in January.
That’s not to knock the long-term prospects; government policy is clearly trending in the right direction for cannabis stocks. However, people may be overreacting in the near term, particularly for struggling companies like Sundial. Speaking of Sundial’s struggles, consider its most recent earnings report.
Dismal Earnings for SNDL Stock
For the most recent quarter, Sundial only generated 13 million Canadian dollars (CAD) in revenues. Revenues plummeted more than 36% quarter-over-quarter and fell a mile short of expectations. Incredibly, Sundial lost 71 million CAD for the quarter in the course of bringing in that paltry revenue number.
It’d be easy to blame the novel coronavirus for the shortfall. However, management actually suggested that Covid-19 hasn’t had a major impact on the company’s operations. Rather, the excess of cannabis overall has decimated the wholesale marijuana market. Sundial has reacted by switching to primarily branded products. However, that changeover isn’t something that you can pull off overnight.
With a half-glass-full view of Sundial, you could say these bad results aren’t actually that meaningful. As mentioned, Sundial is rapidly transitioning from wholesale cannabis to its own branded products. Last quarter, it got 77% of its revenues from branded marijuana products. That’s good news in isolation, though obviously revenues as a whole plummeted as the company gave up the low margin wholesale business. Still, this sort of issue was bound to happen with the change in strategic direction and isn’t too unexpected.
So Bad It Can’t Get Worse?
The positive case for SNDL stock here is that potentially the company has already hit rock bottom and has nowhere to go but up. Sundial has already changed its management team, is pivoting the business model, and has raised more capital. Thus, at this point, it’s something of a fresh start for the company.
Sundial’s chief executive officer Zach George made a key point on the last conference call. This is that the share dilution is almost over:
“Our restructuring has required significant dilution, but we are well-funded through 2021. We expect the current rate of dilution to decline into Q1 2021 as the last of our convertible debt is extinguished. Under current operating conditions, we do not require additional capital in the near-term unless we engage in a material strategic transaction.”
Part of the reason why SNDL stock performed so terribly over the past year was a simple matter of supply and demand. And I’m talking about the supply of Sundial stock, though obviously cannabis supply and demand has also been out of whack. For Sundial, however, the share count jumped from 75 million last year to more than 100 million now. When you add more than 25 million new shares of stock to the market, it’s obviously going to pressure the existing shareholder base.
Now, though, Sundial has finally resolved its near-term debt concerns and has enough cash to go about its business for the next year without having to look for more funding. There’s still no guarantee Sundial’s business pivot will work, but at least they have plenty of time to make something happen before crisis mode sets in again.
What’s the Verdict?
Sundial is in a much better position than your average penny stock trading at 40 cents a share. As such, it’s understandable why traders have latched onto SNDL stock. The company has plenty of cash to keep running through 2021 and is actively trying to refocus the business around its own brands. Combine a low share price with a realistic shot at a turnaround, and you’re going to generate massive trading activity.
That said, Sundial isn’t nearly as cheap as it might first seem. Once you actually look at the market capitalization and financial results, Sundial is not an especially compelling offer.
Sundial could work out for traders in coming months if the overall marijuana sector continues to surge. However, don’t assume the stock is a steal just because it is selling for 40 cents per share. The company is positioned to survive, but it will need to do a lot more to ever achieve real profitability.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.