The narrative surrounding Sundial Growers (NASDAQ:SNDL) and SNDL stock currently doesn’t look very compelling as investments go. At least, not in my eyes anyway.
The Canadian cannabis company is bleeding money. Unfortunately it is doing so at an increasing rate. To compound matters the share price is below $1. This is more than a simple psychological barrier. It has tangible business implications that I’ll get to later.
Sundial is likely to undertake a few strategic business decisions between now and the middle of 2021, which will affect shareholders. The company will be doing lots of pricing gymnastics but don’t let that tempt you into buying shares of SNDL stock.
The only reason to do that will be when the company cleans up its hemorrhaging operations.
SNDL Stock Not Doing Well
Take a look at Sundial’s share price since it became publicly traded and you’ll notice something: soon after the company began trading in 2019 it was apparent it was in trouble. It first traded on Aug. 1, 2019 at $11. It was below $2 by December and a few months later, below $1. It hasn’t eclipsed that barrier since.
There are a few good reasons that markets haven’t received SNDL stock as well as the company might have hoped. Through the first nine months of 2019 it recorded $50.665 million CAD in revenue but which resulted in a net loss of $126.54 million CAD.
Through the first nine months of 2020 Sundial Growers did manage to sell a bit more. Revenue grew to $56,456 million CAD. That isn’t stellar, but improvement is improvement. Unfortunately, the losses really ballooned in 2020. That 2019 net loss of $126.54 million CAD grew to a whopping $175.8 million CAD.
What’s Troubling the Stock?
The problem is Sundial’s assets. The company’s financial statements show that it has a $65.7 million CAD of impaired assets in 2020. In 2019 it had $162,000 CAD worth. Impaired assets are those whose anticipated future cash flows are lower than their current carrying value. That’s like going to a job but having to pay your employer to work there.
In fact, Sundial’s inventory issues are bad enough that it cost them $18 million through the first three quarters of 2020.
Needs More Money to Make Money
The company needs to make money in order to cancel out the losses it has suffered from impaired assets and unproductive inventory. But when you think about it, doing so is counterintuitive.
Sundial’s assets are impaired. The company already knows that the future cash flows from them are anticipated to be net negative.
The other option is to increase operational efficiency in order to diminish the net loss. Companies have a very difficult time doing that in the early growth stages that Sundial Growers is in now.
So the company has looked to the equity markets to raise cash to bail it out.
Dilution or Delusion?
Sundial issued $150 million of common shares on Dec. 14 and currently has a market capitalization of $740 million.
The company began with 100 million shares in late 2019 and now there are more than 1 billion shares outstanding. That’s 10 times more shares, and yet the price has languished below $1 for the majority of that time. Just be glad you didn’t get in on the ground floor only to watch your shares of SNDL stock get diluted by a factor of 10.
It would surprise no one if they dip into the equity markets again to fuel their cash burn. I just don’t suggest you spend any of your money to help them do so. But the share price will rise soon, just not for the right reasons.
Compliance Issues
The Nasdaq isn’t in the business of listing dirt-cheap stocks. To that point, it maintains a minimum bid requirement of $1. Sundial Growers has been notified that they are to maintain that price for a minimum of 10 consecutive days by June 26.
If the company can’t do something to improve investor confidence thus resulting in a price increase, it’ll have to do a reverse stock split. I anticipate that Sundial will have no other choice given its inventory and impaired assets.
You can’t simply throw money at those things via equity raises. But that’s what Sundial has done and where it now sits.
Verdict
There’s no reason to invest in Sundial Growers now. Do not fund this company until it proves that it can do anything but incur $3 of net losses for every $1 of revenue. Because to this point, that’s precisely what it has done.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.
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