At some point, and maybe sooner than anyone thinks, the United States will make marijuana legal at the federal level. Until then, the story hasn’t really changed for troubled cannabis stocks such as Sundial Growers (NASDAQ:SNDL). But don’t tell that to the retail investors who are bidding up SNDL stock.
On one level, I understand the fascination. Sundial is a penny stock, but it has a niche in the premium segment of the cannabis sector. So if cannabis stocks do take off, SNDL stock could soar much higher. And with a stock price of $1.27 (as of this writing), a $1,500 investment buys you a whole lot of shares.
And I can’t argue with those that bought the stock on Jan. 26, and have watched the stock climb over 170%. However, with a gain like that, you might expect investors to pocket their gains and move forward. Instead it looks like the trading crowd is lining up to see how high they can make SNDL stock go.
Over the next few minutes, I’d like to steer you clear of that idea.
Investors Are Not Seeing the Whole Picture
On Feb. 19, Sundial announced it would be converting approximately 98.3 million warrants into shares at a price of 80 cents and $1.10. This is generating $89.1 million in cash for Sundial. At the same time, Sundial announced it was issuing an additional 98.3 million warrants. These will give holders the right to purchase shares for $1.50 in the next 42 months.
This can be a bullish argument for buying SNDL stock. Nascent companies in a sector like cannabis can use stock offerings and issuing warrants as part of a strategy to pay down debt and accumulate cash. And Sundial has managed to do both of those.
However, the other part of the story is that investors want to see progress in terms of revenue and earnings. And that’s where Sundial is failing to deliver. In fact, in its most recent quarter, the company reported a 33% drop in revenue. And that was after a nearly 37% decline in revenue in the prior quarter. To raise even more concern, in March the company announced it was going to dispose of its Kamloops facility in British Columbia and suspend construction of its Merritt BC plant both due to declining consumer demand.
But that didn’t stop the company from giving executives $2.47 million in share-based compensation. That would be nearly 20% of its sales. Executive compensation can be a tricky thing, but if nothing else the optics look bad.
Is Sundial Looking to Buy or Get Bought?
The company’s $22 million investment into Indiva could be another reference point that bulls can reference. However, this investment is being done in the form of a brokered private placement. By itself that doesn’t mean anything. However, the fact that Sundial is faltering in revenue coupled with the recent payout to executives raise two caution flags as to the reasons Sundial is making this investment.
You Can Wait on SNDL Stock
In a prior article, I suggested that the best hope for Sundial bulls might be to have the company get acquired. Adding Indiva’s portfolio of edibles to its product line may make Sundial a more attractive acquisition even with its share price rising. But the fact remains the financials for Sundial suggest that they have a narrow path to success.
Unless you have a high appetite for risk, you should wait until the company reports earnings in late March to see if the revenue picture has improved. Investors that are looking to buy SNDL stock as a quick trade may be rewarded. If you’re looking for an investment there appear to be more solid ways to play the cannabis sector.
On the date of publication Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Markoch is a freelance financial copywriter who has been covering the market for seven years. He has been writing for Investor Place since 2019.