Sundial Growers (NASDAQ:SNDL) has had one of the craziest runs of any stock so far in 2021. SNDL stock advanced from 47 cents at the end of 2020 to as high as $3.96 in February.
And the crazy thing is that this frenzied action had virtually nothing to do with the company’s actual operations.
Some traders have fond memories of GameStop and AMC from their youth and wanted to buy those stocks as a show of support. While capitalism doesn’t really work that way, you can at least see the link from nostalgia to the speculative interest in those shares.
With Sundial, however, there was no sentimental reason for speculators to latch onto it. Sundial obviously isn’t an old established business, nor is it a household name. It’s just one of many upstart cannabis companies trying to secure a decent market share in a fast-emerging new industry.
A Closer Look at SNDL Stock
A year ago, Sundial was in huge trouble. The company was one of many Canadian marijuana producers trying to stand out in an overly crowded marketplace. Furthermore, the company had numerous company-specific hiccups.
For one, U.S. investors sued the company for failing to disclose a product recall tied to bits of rubber showing up in the company’s cannabis. More broadly, the company’s go-to-market strategy simply didn’t work as planned. It turned out that pricing ended up being more important than branding, putting Sundial in a difficult position.
Loaded up with debt and showing dismal financials, Sundial’s management team stepped aside. The new leadership took some painful steps, such as inflating the company’s share count from 107 million to a jaw-dropping 1.5 billion shares over the past year.
However, say what you will, management guided the company back from the brink. Shares have recovered from under a quarter each to back over a dollar and the company has paid off its debt.
Trying to Turn Things Around
It’s great news that Sundial Growers managed to avoid bankruptcy. That’s step one for restoring some shareholder value. However, it’s not nearly enough to support the company’s current $2 billion market capitalization.
You see, the company’s financial results are currently dreadful. Not just bad; they’re horrifying. Sundial lost $228 million over the past 12 months while generating revenues of just $55 million. Revenues fell sharply so it’s not as if the company is growing its way out of this trap either.
The previous management team took Sundial in the wrong strategic direction. New management is doing its best to fix the mess, but it will be a long process to turn this ship around if it’s even possible at all.
Traders seem to think federal cannabis legalization in the United States will fix all these problems overnight. Even if legalization happens soon (which is far from guaranteed), it’s unclear how much this will help Sundial.
More of the benefits will probably go to American marijuana operators. Canada remains stuck in a massive cannabis glut, and that will take time to resolve regardless of what happens south of the border.
SNDL Stock Verdict
It’s unclear when the excitement around meme and Reddit stocks will end. GME stock certainly had quite another surge last week, though it ended up at a much lower peak than the original run-up. So the possibility that other meme stocks like Sundial may get one more squeeze as well.
At the end of the day, however, we know how this is probably going to turn out. Sundial is vastly overvalued compared to its assets, which is primarily its cash balance along with an unproven operating business that hemorrhages money.
This simply isn’t where you want to be in the cannabis market right now. You’ve got the profitable big four American producers, for example, that are growing quickly and generate positive free cash flow.
There’s little reason to waste time and energy on SNDL stock here when there are such far superior options to it in the sector. A low stock price and high short interest make for a decent day trading stock, but it’s not even close to resembling an adequate long-term investment thesis.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.