Today, investors in Sundial Growers (NASDAQ:SNDL) and SNDL stock are taking a hit on the chin. As of early morning trading, shares were down as much as 14% as investors processed some news today.
Let’s dive into the key driver behind today’s action.
Share Issuance Bearish for SNDL Stock
Today, Sundial’s management team announced an equity distribution agreement. This indicated the company intends to issue shares, and investors are pricing in expected dilution into SNDL stock today.
The distribution agreement lays out plans for a raise of up to $80 million. Because of what the company notes has been “significant volatility” in SNDL stock of late, it appears an offer price has not been set.
Indeed, this can be taken two ways by investors.
On the one hand, investors will note that equity raises typically require a discount to the current market price. Given how volatile SNDL stock has been of late, it’s going to be tough for the company to raise this amount of equity without providing a steeper discount.
Accordingly, the fact that Sundial’s management team pointed out in its equity distribution agreement announcement that there’s really no precedent for these volatile moves seems to have spooked investors. Since releasing its earnings report on March 17, the company noted “there has been no recent change in our financial condition or results of operations, such as our earnings, revenues, or other measure of company value that is consistent with the recent change in, and volatility of, our share price.”
On the other hand, investors will note that recent equity raises, though dilutive, have shored up Sundial’s balance sheet. Furthermore, these equity raises have made it possible for the company to look at pursuing growth deals.
So what is the bottom line? The level of dilution this deal will likely require may be too much for many to handle right now.
Other Investors Bearish on Sundial
It turns out I’m not the only investor concerned about the rapid rise in SNDL stock this year.
Today, a report issued by The Motley Fool highlights some of the key concerns with Sundial. Among these, dilution ranks high in the minds of many analysts who cover this stock.
While meme stock trading appears to remain popular, the party will stop at some point. This sort of speculative bonanza we’ve seen of late can’t last forever.
For investors who got in early on SNDL stock, there’s no shame in taking profits. The bears appear to be out of hibernation right now on this stock, and further downside could be on the horizon.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article.
