“Let pump SNDL at least $1.50 today,” announced a post on Reddit. “Absolutely Realistic,” responded another. In less than a week, individual investors on social media sites sent Sundial Growers (NASDAQ:SNDL) stock up 100% to $1.20, capping off a 760% gain since November.
Once at risk of de-listing, the former penny stock now finds itself a hapless star of the r/WallStreetBets show.
Long-term investors might usually shrug. Many of Reddit’s recent targets have weak fundamentals and outlooks — with prices that fall as fast as they rise. Sundial’s chaotic ascent, however, looks different. With the U.S. Senate Majority Leader Chuck Schumer now committing to push a marijuana reform bill later this year, the Canadian marijuana company could suddenly see the U.S. market spring wide open.
And with its recent $74.5 million capital raise (thank you, Redditors), the company now has the financial heft needed to rise to the occasion.
It’s going to be a scary ride – as of writing, shares are at $1.21. But with some luck, Sundial holds the potential for another 10x gains.
SNDL Stock: Reddit Senses a 10x Stock
The future for Sundial hasn’t always looked so bright. As late as November last year, SNDL stock hovered 14 cents as the company teetered on bankruptcy.
Not all of this was Sundial’s fault. For years, U.S. legislators had teased the possibility of marijuana decriminalization. But as legislative delays mounted, growers saw their expansion plans produce more cannabis with nowhere to go. By the fourth quarter, Canadian oversupply was so severe that Sundial saw its wholesale prices for cannabis sink from $1.73 per gram to just 66 cents.
But then Reddit users sensed a shift. With Democrats taking control of both the U.S. House and Senate, America might finally see marijuana reform bills pass. And that would send Sundial’s stock skyrocketing.
Sundial Calls for Aid, And Reddit Will Answer
Since November, Sundial has wasted no time in capitalizing on its good fortune. The company’s management announced they had used its entire registered offering to raise $74.5 million. Adding that to proceeds from its last year’s restructuring makes Sundial the only debt-free company among the significant marijuana producers.
The company has also aggressively moved into the higher-value market for branded products. Sales of branded items, which fetch 6 to 7x more than wholesale prices, now account for a quarter of production (almost 80% of sales). In a market where brand loyalty can sometimes mean even more than having the absolute best products, Reddit’s free advertising is a gift that could help Sundial’s brands compete against better-known brands.
The unintentional fame could go a long way in helping Sundial catch up in quality. In its 3Q report, the company admitted to missing THC content requirements – a huge misstep in the wholesale world. As the company transitions to branded products, expect these issues to matter less over time.
Reddit’s Push Makes Sundial Stronger
There are plenty of marijuana companies with even more significant potential to become America’s next “Big Tobacco.” Many like Canopy Growth (NASDAQ:CGC) already have large corporate affiliates with existing supply chains to match. Others, like Tilray (NASDAQ:TLRY), have a stable of premium brands that sell for higher prices than Sundial’s current lineup. These companies look set to gain handsomely the moment the U.S. decriminalizes marijuana on the federal level.
But it was Sundial, with its sub-$1 share price, that captured Reddit’s imagination. By investing in a company at such a low base, Reddit users correctly reasoned they could own a lottery ticket in marijuana decriminalization.
And they could still be right.
Today, Sundial has $615 million unrestricted cash, or 40 cents cash per share. That makes its $1 share price a reasonable bet. For every dollar you put in, you’re acquiring the company for just 60 cents.
Whether Sundial’s management can capitalize on their newfound financial security remains an open question. The company still earns lower gross margins than any of its peers, and a $10 share price looks the stuff of dreams. But if Congress manages to pass a marijuana decriminalization bill, that would open the floodgates to an industry that’s almost as large as the U.S. tobacco market. If Sundial could capture a small portion of that $83 billion-per-year market, the company could easily reach a $11 billion market cap.
Don’t bet against Sundial quite yet. The best might yet be to come.
On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.