Sundial Growers Stock Still Has a Lot to Prove Despite New Debt-Free Status

Sundial Growers (NASDAQ:SNDL) is attracting a lot of attention after completing its financial restructuring and acquiring debt-free status. But does that mean anything new for SNDL stock?

marijuana in storage

Source: Shutterstock

The Canadian cannabis-producer extinguished $227 million in debt through a mix of asset sales, debt/equity swap, capital raises and cash repayments.

However, SNDL is not out of the woods yet. If the third quarter’s financial and operational results are any indicator, the company has a long way to go.

Revenue came in at 9.85 million CAD, missing estimates by 7.11 million CAD. Net loss was 71.4 million CAD compared to a net loss of 32.8 million CAD in the second quarter of 2020; adjusted EBITDA loss rose by 13% over the previous quarter to 4.4 million CAD from 3.9 million CAD.

On a positive note, gross margin improved from 20% compared to 14% in Q2. Sundial did not give any guidance, but Wall Street isn’t optimistic regarding its prospects. Analysts are expecting a loss of 6 cents per share in the fourth quarter.

All this hasn’t stopped investors from rushing in and buying the stock. Shares are up 116% in the past three months, a very respectable return for a company on the ropes just a few months prior.

But as Mark Hake points out, a debt-free balance sheet will mean little if the company doesn’t start to generate revenues and improve underlying fundamentals.

MORE Act and Biden’s Win

Cannabis stocks are enjoying renewed interest these days due to a host of positive catalysts — mostly on the political front. On Jan. 20, President-elect Joe Biden will take oath as the 46th president of the United States.

If he fulfills a key campaign promise, federal marijuana reform will be part of his administration’s legacy. During his time in the Senate, he pushed punitive anti-drug legislation. But on the campaign trail, he has called for decriminalizing cannabis possession.

Canopy Growth (NASDAQ:CGC), Aurora Cannabis (NYSE:ACB) and Tilray (NASDAQ:TLRY) all soared on the back of Biden’s presidential victory. Canopy CEO David Klein said, “We believe the Biden win is an important step on the path to federal permissibility of cannabis in the U.S. market through decriminalization and descheduling.”

The U.S. House of Representatives has also passed the MORE Act — for Marijuana Opportunity, Reinvestment, and Expungement — to legalize marijuana at the federal level. However, for the MORE Act to become law, further approval is required from both the Republican-controlled U.S. Senate and the president’s office.

I recommend reading Josh Enomoto’s recent article if you want more color on how the upcoming Georgia runoff elections impact SNDL stock.

Taking a bird’s eye view, things seem to be going in the right direction for the Canadian cannabis industry. Readers of this space will know that Canadian pot stocks listed on U.S. exchanges remain heavily dependent on more states legalizing marijuana in the U.S., the biggest and most important market in this new high-growth sector.

As a byproduct, Sundial Growers stock is also doing well. But it’s important to note that this has nothing to do with the company itself.

How Much Dilution Is Too Much for SNDL Stock?

One has to give credit to Sundial management for cleaning up the balance sheet. However, that has come at a cost. Total shares outstanding rose from 72.8 million in March 2019 to 206.7 million in September 2020, a rise of 183.93%. Operating loss over the same period has increased by 84.85%.

It’s an unsustainable model, and as Mark Hake puts it, it’s a death spiral for Sundial Growers stock. The Canadian cannabis producer recently filed a shelf registration to issue up to $200 million in securities and separately filed a preliminary prospectus for an at-the-market equity program for up to $150 million of common stock.

These stock issuances are providing the company with a lifeline. However, in the long run, the company has to demonstrate revenue growth. Until that happens, there is no amount of capital raising that can sustain its operations.

It’s a heartening sign that Sundial management understands this predicament. That’s why it’s changing its brand strategy to concentrate more on retail and less on wholesale.

The Bottom Line

The next few quarters should give us a fair indication of where SNDL stock is headed next. On Nov. 30, the company said it now has 85 million CAD in cash due to warrant exercises. That should give it more breathing room to grow sales but only just.

Like many of my InvestorPlace colleagues, I believe that the stock is only for overenthusiastic day traders who want to try their luck. If you are an investor that values fundamental strength, Sundial Growers stock remains a perilous proposition despite the financial restructuring.

On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Faizan Farooque is a contributing author for and numerous other financial sites. Faizan has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio. Faizan does not directly own the securities mentioned above.   

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