Sundial Growers (NASDAQ:SNDL) is a Canadian cannabis company that has raised a large amount of money recently, and started making investments with that cash. It is almost as if the company is a sort of cannabis investment fund. SNDL stock will eventually reflect the value of its cash and investments.
On Feb. 4, Sundial closed a capital raise round and immediately declared that it now had 610 million CAD in cash on its balance sheet. It also said that it made 61 million CAD in securities investments. So the total of its cash and securities was 671 million CAD.
Cash as a Percent of Market Cap
Then on Feb. 19, Sundial Growers said it had raised another $89.1 million in U.S. dollars from warrants that were being exercised. That means that its cash and securities in Canadian dollars have risen by another 112.56 million CAD to 783.56 million CAD.
This is important since we can determine how much it represents as a percentage of the company’s estimated market cap. I say estimated, since the company has raised so much cash that it is not even clear how many shares it has outstanding.
In the Feb. 4 announcement referenced above Sundial said it now had “approximately” 1.56 billion shares outstanding. Keep in mind that on Sept. 30, 2020, the company had just 206 million shares outstanding (see page 22 of its Q3 financials).
However, since Feb. 4, Sundial issued another 98.3 million shares on Feb. 19 from the exercise of warrants. That brings the total to 1.66 billion shares outstanding.
Since SNDL stock trades at $1.29, the total market capitalization is $2.02 billion in U.S. dollars. That works out to 2.54 billion in Canadian dollars.
Since the company has 783 million CAD in cash and investments, this represents 30.2% of its total market cap. By the way, this is the same whether you measure it in US dollars or Canadian dollars.
For example, its 783 million in cash and securities works out to 47 cents per share Canadian (i.e., 783 million divided by 1.66 billion shares) or US 37 cents per share. And US 37 cents divided by the SNDL stock price of $1.29 equals 29.1%.
Waiting for SNDL Stock To Fall
To say that Sundial Growers management does not care about their share dilution is an understatement. They obviously believe it is better to dilute shareholders and gain the cash as a way to make SNDL stock go up.
This will not fly. The market will catch on and the stock will eventually fall. It will drop closer to its cash and investment value per share. This is all the more true since their underlying business is still losing money. We will know more about that once the company issues its latest financials.
By the way, the company has made so many investments lately that it is not even clear how much cash is actually really left on its balance sheet.
For example, on Feb. 16 the company made a 22 million CAD investment in another Canadian cannabis company, Invidia. I described this investment in my last article on Sundial. Invidia is another money-losing cannabis company that would have been insolvent without Sundial’s investment.
Therefore, it seems clear to me that most investors should wait for SNDL stock to fall further. This could be when it is very close to the cash and investments per share, or 37 cents per share.
In addition, we can add on a small premium for the underlying money-losing cannabis business, say 11 cents or so. That would value it at roughly 3 times sales.
Therefore, SNDL stock is not worth much more than 48 cents per share, or just 37% of today’s price. In other words, stay away from SNDL stock until it falls.
On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities in this article.