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Sundial Is Still Not a Great Buy on the Pullback

Sundial Growers (NASDAQ:SNDL) stock was set ablaze last week thanks to another r/WallStreetBets trading frenzy.

Image of a marijuana grow house
Source: Shutterstock

As stocks like AMC Entertainment (NYSE:AMC) and GameStop (NYSE:GME) cooled off after last month’s parabolic rally, Redditors soon turned their attention to pot stocks. This interest stems from the mass legalization of marijuana sweeping across the nation.

Following a mention on r/WallStreetBets on Feb. 10, SNDL stock was in for a roller-coaster ride last week. Shares of the company were up 79%  before settling down by 19% on Thursday. While the rally did result in some short-term gains for investors who timed their bets well, SNDL is still fundamentally not a sound investment.

Here’s why.

A Closer Look At SNDL Stock

Fueled by optimism from the Reddit community, SNDL stock experienced a massive rally In its price last week. The cannabis stock was  is up more than 320% since the start of 2021.

While this price boost definitely adds to its allure, in reality, the fundamentals of the business are still considerably weak. For one, the SNDL stock is grossly overvalued at its current price. With revenue of just $37 million, the company has a market cap of $3.1 billion (post-rally). This puts this stock at a steep valuation, regardless of the market environment.

On a slightly brighter note, the recent rally allowed Sundial Growers to raise a stream of cash. The company used the increase in its share price as an opportunity to exchange shares for cash. As of February, Sundial reported outstanding shares of 1.56 billion and a cash balance of $610 million. This will enable it to pay down in debt of $72 million in whole.

For a company that was close to bankruptcy last year, the ability to raise this much cash over a few months is, by no means, a small feat.

But it’s also worth looking at it from a different angle. While the cash will help alleviate Sundial’s financial woes in the short term, the company continues to lose large amounts of cash. This largely stems from poor management of inventory that the company claims it is actively working to resolve.

In the past year, Sundial burned through CA$113 million from its operations. While its current cash balance can help sustain this burn rate, the cannabis company still needs to have a better hold on its costs for long-term profitability.

Potential Long-Term Tailwinds

A huge cash balance in its pocket also means that Sundial Growers has the opportunity to restructure its business. And it looks like all the arrows are pointing to just this. A recent example of this is Zenabis Global (OTCMKTS:ZBISF). After Sundial made an initial investment in the company to purchase its debt, Zenabis later claimed this was the company’s attempt at a forced acquisition.

While this acquisition did not go in Sundial’s favor, there is still a good chance it will add to its existing operations in the near future. During its IPO, the company stated that it would use the cash raised for acquisitions and investments.

But while this does seem like a positive catalyst for the company, it’s all still hearsay at this point. What Sundial does with its healthy cash balance is yet to be seen.

If it is able to utilize the cash to expand its footprint in the cannabis industry, it will add significantly to its bottom line. A liquidity position of $610 million certainly gives the company a long runway for growth but investors will need to hold out till the next earnings report to gauge these tailwinds.

The Bottom Line

The recent rally certainly gave SNDL stock a big boost but the company still has a lot to prove. Specifically, with regards to operational improvements and revenue levels that will justify its market cap.

With no clear path to profitability right now, investors will still need to wait and see where this stock is headed. Its upcoming earnings report will also provide more clues as to what Sundial plans to do with its large cash balance.

I’m not saying the company is a bad investment. It just has a lot to prove. Investors who believe in comeback stories could potentially find this stock to be just that.

However, if you’re more averse to risk, I would definitely hold off on taking the plunge and see how things play out in the coming weeks and months.

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

Divya Premkumar has a finance degree from the University of Houston, Texas. She is a financial writer and analyst who has written stories on various financial topics from investing to personal finance. Divya has been writing for InvestorPlace since 2020.


Article printed from InvestorPlace Media, https://investorplace.com/2021/02/sndl-stock-is-still-not-a-great-buy-on-the-pullback/.

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