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Why Marijuana Penny Stock Sundial Isn’t a Good Buy Now

It’s been a forgettable year for Sundial Growers (NASDAQ:SNDL). Indeed, SNDL stock has plunged from $3 at the start of 2020 to just 50 cents or so per share now.

a marijuana leaf displayed among other numbers related to stock performance
Source: Shutterstock

However, traders haven’t given up on Sundial. In fact, trading volume has been surging in recent weeks as shares rallied sharply from their recent lows. That said, the stock is back on a bit of a downswing following the company’s latest stock offering.

So what’s the story for SNDL stock heading into 2021?

A Strategic Pivot

Sundial reported an awful set of Q3 results in November. Revenue collapsed, plunging 61% from the same period last year. With that plunge, total revenue numbers came in under $10 million for the quarter, which is not too impressive. Particularly in light of the fact that the company has an overall market capitalization of more than $400 million. You’d generally like to see stronger revenue, or at least growth rather than a massive decline in sales to justify that valuation.

The company is taking corrective actions to improve its sales slump, however. For one thing, according to CEO Zach George, the company didn’t produce the right potency of cannabis product to match consumer demand. Sundial is fixing that product issue now. It’s also changed management around, paid down debt, and is working through inventory issues, among other efforts.

Only time will tell just how difficult these issues are to address. What we can say, however, is that the company is on stronger financial footing. Thanks to selling a ton of new stock, Sundial paid a major chunk of debt while also building up cash. This gives it funding to operate through next year and continue to pursue its turnaround efforts. This hardly guarantees future success for Sundial, but it at least has a decent shot at improvement.

Not As Cheap As It Looks

With a share price of around just 50 cents, you might think SNDL stock is a steal. After all, shares traded for as much as $10 in 2019. At this price, how much further could they actually decline?

The truth is, however, that market capitalization, not the share price, is the more important factor. And since Sundial issued prodigious amounts of stock, it heavily diluted its shareholder base. To put numbers on that, following the initial public offering (IPO), Sundial had around 100 million shares of outstanding stock. Now, with its latest $150 million stock offering, Sundial’s share count will balloon to more than 1 billion shares. That’s roughly a 10-fold dilution within the span of a couple of years.

As a result, the company’s market capitalization today is almost $500 million despite the optically low share price. And as long as Sundial keeps selling more new stock to the public, its overall valuation can continue to swell even if the share price remains in penny stock territory. That said, like marijuana peer Hexo (NYSE:HEXO) recently did, it wouldn’t be surprising if Sundial does a reverse stock split to get its share price up to more respectable territory.

SNDL Stock Verdict

I suspect that many traders are primarily interested in Sundial because of its low stock price. That’s not a good reason on its own to make an investment, though. When you look around the marijuana sector, there are companies with far more promising business models and operating results.

Leaving stock prices aside, there is little other reason why most people would pick Sundial as the most compelling industry investment. Particularly among the U.S. marijuana companies, you already have firms that are profitable today and growing quickly. Those are much safer investments than a turnaround play such as Sundial.

To be sure, Sundial could make a real comeback. It seems management has a decent grasp of what has gone wrong and has some reasonable ideas about how to fix things. But the company’s financial results are so meager that it will take at least a few quarters for Sundial to right the ship, if it is able to do so at all. As such, there’s no rush to buy SNDL stock today, particularly with the likelihood of more stock dilution and a potential reverse split in the future.

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.

Article printed from InvestorPlace Media, https://investorplace.com/2021/01/sndl-stock-sundial-this-marijuana-penny-stock-isnt-a-good-buy-now/.

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