I recently read a headline that asked how much Sundial Growers (NASDAQ:SNDL) was really worth. Over the past 52 weeks, SNDL stock has traded as high as $3.96 a share and as low as 14 cents. 

For SNDL stock holders, your perspective on this subject really depends on when you picked up your shares. 

If you bought at the high in mid-February, you probably have an intrinsic value north of $4. If you bought at the November low, you’re happier than a pig in you-know-what despite the 52% drop in price over the past month.

As someone who pontificates about stocks, my last article about the cannabis grower in mid-February had me struggling with its share price. At the time, it was still trading well above $2. 

I argued that even though the company’s financial situation had improved immensely, the Canadian marketplace’s competition was too intense. I reasoned that only speculative investors should consider getting in, and even then, spending less than $2 per share for the privilege. 

A month later, and trading around $1.40, I feel vindicated for my call. 

Through the rest of 2021, investors will likely ponder the question I mentioned in the first paragraph.

Is SNDL stock worth 14 cents or $3.96? Here are my two cents on the subject. 

SNDL Stock Is Worth Almost $4 a Share

I’ll admit, making this argument will be a bit of a stretch given my previous articles about Sundial, but when it comes to investing, it pays to keep an open mind.

InvestorPlace’s Robert Lakin recently discussed some good news about the cannabis producer. Apparently, Cantor Fitgerald analyst Pablo Zuanic doesn’t hate Sundial’s business prospects. The analyst gives it a “neutral” rating and a 12-month target price of $1.15. 

I know what you’re thinking. How does that equate to $4? Good question.

Zuanic believes that the financial housecleaning CEO Zach George performed over much of 2020 — it eliminated $227 million in debt to be debt-free with 617 million CAD ($488 million) in cash on its balance sheet — puts Sundial in an excellent position to consolidate a lot of the little players that aren’t of interest to the big boys and would, otherwise, likely go out of business.

One way to value Sundial is price-to-sales. Sundial’s expected to announce Q4 2020 results on March 17. In the first nine months of 2020, it had net revenue of 47.1 million CAD, slightly lower than a year earlier. If we annualize that to 63 million CAD ($50 million), it’s currently trading at 47 times sales based on a $2.35 billion market capitalization.

However, if it uses $250 million of its cash hoard to buy down-on-their-luck Canadian cannabis growers at a more reasonable multiple of, say, 5x-6x sales, it would be able to double its annualized sales virtually overnight. 

In my latest article, I mentioned that Sundial moved away from wholesale to selling its own branded products. As a result, its sales dipped by 54% in the third quarter. 

An acquisition would immediately close the gap in sales that occurred by abandoning the wholesale model. That could be worth $1-2 per share to investors, which would raise its share price to between $3 and $4 as a result.

It’s Virtually Worthless

Okay, I’m getting a little hyperbolic. I’m not sure it’s ready for the scrap heap just yet. It’s trading at less than four times its cash-per-share of 33 cents ($488 million divided by 1.46 billion shares).

That ought to count for something.

But here’s the thing. 

It’s one thing to say Sundial will be able to run out and acquire a bunch of down-on-their-luck cannabis companies, integrate them successfully, and live out a prosperous future. The reality is much more difficult. 

If you’ve written about mergers & acquisitions as long as I have, the one thing you realize is that most don’t deliver anywhere near the “so-called synergies” touted when the deals are first announced. 

Constellation Brands (NYSE:STZ) is still working through some growing pains with its investment in Canopy Growth (NASDAQ:CGC). And while Canopy Growth is benefiting from former Constellation CFO David Klein’s strong leadership, it’s taken him 14 months to get it on the right track.

As many have found out in the cannabis world, having a lot of cash to spend is no guarantee of success.

The Bottom Line

As I stated in February, I believe that current shareholders are better served if Sundial stays the course on its transformation to brand owner from flower provider, continues to work with the Canadian provinces it has supply agreements, and keeps its cash stash for a rainy day. 

If it does, it’s got a shot at $4 sometime in the next 12-24 months. If it makes a splashy acquisition, in my opinion, it’s one more nail in its coffin.

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

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.