The Bear Case Continues To Widen For Sundial Growers

Canadian marijuana producer Sundial Growers (NASDAQ:SNDL) has had quite the year. It was on the brink of bankruptcy after falling through on its debt covenants. As we speak, though, it is debt-free and has CA$672 million in cash and marketable securities raised through multiple stock offerings. SNDL stock was bid up as part of the Reddit-induced short squeeze, with the stock rising 122% this month. However, despite dispelling near-term financial concerns, the real problem is its earnings performance.

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Sundial has sold a ridiculous amount of its stock for capital. Back in August last year, its outstanding shares were less than 200 million. As of now, though, its share count has risen to a whopping 1.56 billion. Therefore, the company’s cash balance appears to be sublime and significantly more than what it needs at this time. However, the real challenge is to expand its revenues and profitability, which have dipped considerably off-late. Hence, despite having steered itself out of its financial conundrum, SNDL stock is still in a significant spot of bother.

Shoring Up Its Finances

As mentioned before, Sundial stock was facing major liquidity concerns and had to restructure its financing structure in June. Its shares were trading at just 14 cents when in 2019, they were trading above $12. In correcting its distressing financial position, the company filed a mixed prospectus for $100 million and an ATM program to issue up to $50 million worth of shares.

Later in 2021, SNDL stock caught up in the retail trading frenzy, with the stock up 223% since the beginning of the year. Sundial took advantage of the heightened investor interest in issuing more equity. Its outstanding shares were at 206 million in September to 1,520 million this month to put things in perspective. Its share count has risen by almost seven times in just four months.

The question is now how the company plans to spend its $672 million of cash. It will look towards strategic expansion, considering it only needs roughly $21 million for its operations. It will be looking up to scoop up assets in its home country and the U.S. Strategic acquisitions are likely to take up a significant portion of its expenditures in the coming future. A few acquisition targets have come up already, including distressed Canadian pot grower Zenabis. Zenabis has a massive cultivation footprint in Canada had reported C$19 million in revenues in the third quarter of 2020. Moreover, Sundial could also make its move in the international markets such as the U.S.

Lackluster Top and Bottom-line Results

Despite the positive developments off-late, it’s tough to be excited about the stock considering its weak earnings track record. It has failed to beat analyst estimates in the past five quarters, with minimal expansion in revenues.

In its third quarter, revenues were down 36% sequentially to CA$12.9 million. Moreover, its dried cannabis sales fell 23% in comparison to the third quarter in 2019, and the net selling price for its products dropped 37% to CA$2.21 per gram.

Gross margins tanked 66% on a year-over-year basis. Moreover, the company had to dispose of its Kamloops, British Columbia (BC) facility and suspend operations in its Merritt BC plant due to a lack of consumer demand. Surprisingly, the company executives took home CA$3.12 million in share-based compensation, which amounted to roughly 20% of its quarterly sales.

It’s clear that the company’s sales mix is far from ideal. It could be due to the inferiority of its product or the lack of distribution channels in other provinces. Therefore, Sundial offers little upside for its investors at this time.

Final Word on SNDL Stock

SNDL stock got caught up in the recent short squeeze and has done well to shore up its finances in the past few months. However, its underlying problem remains, which is its inability to improve its top and bottom-line meaningfully. There are no growth catalysts for its business currently insight. It could expand its business with its massive cash balance but needs to fix its underlying business issues before anything else. Hence, it’s best to avoid SNDL stock for now.

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


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