Since the start of the year, Sundial Growers (NASDAQ:SNDL) has gone from 48 cents a share to a high of $3.90. Although, lately the shares have given up a lot of the gains. Note that SNDL stock will open today at around $1.26.
It’s certainly been a wild year for the markets. The r/WallStreetBets forum on Reddit has upended Wall Street and stirred up much debate. There was even a Congressional hearing about the phenomenon! SNDL was one of the various stocks r/WallStreetBets propelled to stratospheric levels.
Founded in 2006, Sundial is a licensed cannabis producer based in Alberta, Canada. The company operates a 470,000 square foot facility and has several brands like Palmetto, BC Weed Co and Topleaf.
So then with SNDL stock, can the rally get back on track? Or are things just too speculative right now? Well, for the most part, I think investors should be cautions. And let’s take a look at three reasons for this:
Valuation on SNDL Stock
Even with the sharp drop in the SNDL stock, the shares are far from cheap. Consider that the market capitalization is about $2.3 billion yet its revenues are projected to reach about $66 million in 2021. This means that the stock trades at 35 times sales on a forward basis.
Besides, when the stock had its big run-up, there was little news about the company. But hey, with Reddit traders, they were just looking at technical factors, like the potential for a short squeeze. This is when short sellers have little choice but to close out their positions – which is done by buying back the stock.
The irony was that the short interest was fairly low for SNDL stock. In other words, the spike was just mostly due to heavy speculative buying, which cannot last for long.
Now Sundial was smart to pull off multiple financings to capitalize on the speculative surge. The result is that the balance sheet is in much better shape.
The company still faces challenges, and there is also a large amount of new stock in the float, which could mean further downward pressure on the price. The number of shares outstanding is a whopping 1.56 billion—and this does not include the millions of warrants that can be converted into equity.
Moreover, there has been a continuing fall off in volume in trading SNDL stock. It looks like Reddit traders are looking for other opportunities. This has been consistent with other targets, such as GameStop (NYSE:GME), AMC (NYSE:AMC) and so on.
In the latest quarter, the revenues plunged by 36% for net cannabis offerings to $12.9 million. The main reason was that the company has been transitioning to branded retail items.
But the losses continue to remain quite high. For the past year, they came to CA$113 million in the quarter.
It really does look like the company needs to take more efforts to get its costs aligned with the overall business. True, focusing on premium items will help – but there will still be more to get the business on track.
Yes, there is hope that the U.S. federal government will ultimately legalize cannabis. The Biden Administration does look amenable to this.
Yet the Democrats still have a razor-thin majority in the Senate. The Biden Administration also has many other pressing issues to deal with. So cannabis will probably not get much attention any time soon.
Thus, for a company like Sundial Growers, it could be really tough to sustain its out-sized valuation.
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the author of courses on topics like the Python language and COBOL.