Thanks to last month’s hyping up of pot stocks on r/WallStreetBets and other platforms, Sundial Growers (NASDAQ:SNDL) rallied from mere pennies to nearly $4 per share in a matter of weeks. Since then, shares across the board have pulled back in a big way. SNDL stock will open today at around $1.40.
Speculators who got in early and cashed out near the top are long gone. Those who got in too late, or have decided to hold on? Watch out!
Without mass hype online driving its share price, investors are starting to value this on its fundamentals once again. That’s not a good thing for several reasons.
First off, this Canada-based cannabis company’s turnaround remains a work-in-progress. Until it posts better quarterly results, it’s going to be tough to justify additional moves higher.
Second, valuation is sky high relative to its underwhelming fundamentals, even at today’s low share price. At $1.40 per share, the company’s current market capitalization is around $2 billion. Compare that to estimated sales of around $65.4 million for 2021. In short, you’re paying premium prices for what’s (for now) a subpar business.
All it’ll take to change this or any other major pot stock’s fortunes is further U.S. pot legalization progress. But, even while the odds have improved, legalization in the near-term remains a long-shot.
So, as drivers outside of fundamentals are fading, and the company’s current valuation sky-high, the best move is to continue to stay away.
SNDL Stock: Why This Low-Priced Stock Isn’t Cheap
After falling more than 67% off its highs, shares may look “cheaper” now than they did before, but it’s still sporting a frothy valuation, even at today’s discounted prices.
When I last wrote about Sundial back on Feb. 16 (when shares traded for around $2 per share), I made the case why shares would trade for around 85 cents per share if investors started valuing SNDL stock as they did Canopy Growth (NASDAQ:CGC) stock.
Since then, shares have gotten closer to this price target. Yet, on second inspection, even this estimated value looks a bit stretched.
Comparing Sundial to Canopy isn’t really apples-to-apples. Until Sundial locks down a deep-pocketed partner or starts making big moves into promising areas like cannabis-infused beverages, it shouldn’t be considered in the same league.
So, which league does SNDL stock belong in? As an also-ran Canada-based pot name, it has much more in common with Organigram Holdings (NASDAQ:OGI). Like this stock, OGI stock went on a wild ride as well thanks to “meme stock madness.”
Even with its shares still elevated from the hype, Organigram trades for a more reasonable valuation of 9.6x estimated FY21 (fiscal year ending Aug 2021) sales. Investors may today value Sundial as if it’s a Canopy in the making, but if they decide to start valuing it more like this less-pricey pot play, shares may have much more room to fall.
How much more? Valuing SNDL stock with a 9.6x sales multiple, and you get around $627.8 million, or around 40 cents per share. In other words, a possible second pullback of around 69%.
Cash Position May Help Soften the Blow
While this stock’s valuation theoretically could contract tremendously, it’s hard to tell whether that’s a probable scenario. It doesn’t make sense for SNDL stock and OGI stock, so similar to one another, to have such an extreme valuation discrepancy.
A big reason behind Sundial’s inflation valuation has been the massive shareholder dilution over the past few months. As InvestorPlace’s Mark Hake wrote Mar 3, the company’s share count has exploded from 206 million to 1.56 billion since Sep 30.
With recent price action being driven by hype rather than fundamentals, Mr. Market has failed to factor this dilution into the stock price.
So, does that make it a “waiting for the other shoe to drop” situation? Not exactly. The flip side to this dilution is that now the company has a relatively-large cash position.
This war chest (worth about 37 cents per share, based on Hake’s numbers) could help soften the blow.
Shares are likely headed below $1 per share, but instead of bottoming-out at 40 cents per share, they may stabilize at slightly higher levels. Say, 60-70 cents per share, or where the stock traded for back in January.
Bottom Line: Don’t Waste Your Time With SNDL Stock
Unlike in prior articles about Sundial, I didn’t focus much on the legalization catalyst. While more U.S. states have moved towards legalization, action on the federal level has seemed to stall.
With even Vice-President Kamala Harris reportedly favoring decriminalization instead of full-on legalization, it may be an even longer road ahead until companies like this one can enter the American market.
With meme stock mania fading and the likelihood of near-term federal legalization also fading, what’s the best move regarding SNDL stock? Until shares fall to a more reasonable valuation (under $1 per share), continue to avoid it.
On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.