Can tiny Canadian cannabis producer Sundial Growers (NASDAQ:SNDL) keep its head above water? SNDL stock isn’t in great shape.
The Calgary, Alberta-based company has struggled mightily in recent months to keep its share price above $1 and avoid being delisted by the Nasdaq stock exchange.
At the same time, SNDL stock has been throttled by traders who congregate on r/WallStreetBets sending its share price on a wild ride over the past few months.
The question facing the company now is: Can they build their business up to a point where they win the confidence of legitimate, long-term investors?
Edibles and SNDL Stock
Sundial Growers is trying to grow and expand by developing edible cannabis products. This past February, the company announced a $17.6 million investment in edibles company Indiva (CVE:NDVA) to expand its offerings in that segment of the cannabis market.
Sundial Growers is also investing $80.7 in a joint venture with private equity group SAF to help it finance its expansion into edible products.
The focus on edibles comes after Sundial Growers’ traditional cannabis products proved to be unpopular with consumers. Last year, the company was forced to discontinue about 60 cannabis products due to poor sales.
Sundial Growers currently has about 40 cannabis products remaining, but, together, they comprise just 2.7% of the Canadian recreational cannabis market. Sundial’s net loss over the past three quarters has been 39% greater than in the year-earlier period.
Stock Dilution
Retail investors who frequent the Reddit commentary boards pushed SNDL stock up to an all-time high of $3.96 on Feb. 10. The jump was quick and the share price is now back down to just $0.85.
However, the company used the squeeze in its share price to raise additional capital. Last July (2020), the company had about 100 million shares outstanding. At the end of March this year, the number of Sundial Growers’ outstanding shares stood at 1.66 billion. That stock dilution is part of the reason why the share price is back under $1.
While investors tend to dislike stock dilutions on the magnitude of Sundial Growers, the company did use the money it raised to trim its debt load, paying off $518 million that it owed to various creditors.
While the debt repayment is encouraging, the company will need to make some headway with its cannabis products and sales if it is to remain a going concern over the long term. At some point, Sundial Growers will also want to buy back some of its own stock to help firm up its soft share price.
The $1 Threshold
More immediately, Sundial Growers needs to keep its share price above $1 to avoid being delisted by the Nasdaq stock exchange.
The stock has taken several runs above $1.50 a share since its February peak but always ends up falling backward. While rumors continue that Sundial Growers could be targeted for a takeover as Canada’s cannabis sector consolidates, no suitors have come forward yet.
Optimism continues over the growing possibility of U.S. cannabis legalization at the federal level under the Biden administration, but cannabis legalization is still happening on a piecemeal, state-by-state basis.
In Canada, legal cannabis producers such as Sundial Growers continue to compete against the black market where nearly half of all sales take place these days. Competing on potency and price has been difficult for heavily regulated and taxed legal producers such as Sundial Growers.
Pass on SNDL Stock
Sundial Growers remains a small player in the cannabis space whose shares trade at the depths of the penny stock tables.
While the company has taken some positive steps by paying down debt and expanding into edible cannabis products, those moves are not likely to be enough in the long-term to lift the company and improve its outlook.
Going forward, Sundial Growers needs to aggressively expand and start turning a profit. Until that happens, investors would be best advised to steer clear of SNDL stock. There are many other more worthwhile cannabis investment opportunities available right now.
On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article.
