After rewarding speculators with months of trading opportunities thanks to its volatility, trading volume on Sundial Growers (NASDAQ:SNDL) remains high. Sundial is a Canadian supplier of premium inhalable goods, and SNDL stock has lately received much attention from marijuana stock enthusiasts.
SNDL stock is perking up after a stock sale and a fourth-quarter earnings report. So what are its upside prospects like for 2021?
On March 25, Sundial announced an equity sales agreement. It will sell up to $800 million worth of shares. Canaccord Genuity and ATB Capital Markets are the agents for the deal. Despite holding cash of $719 million (per slide 3) in the last quarter, the equity raise is unusual. Management may think the stock price is overvalued and want to capitalize on the mispricing before it falls.
Alternatively, Sundial is planning on one or more merger and acquisition deals. This stock offering will dilute investors in a bad way. In return for the short-term pain, the company gets a cash infusion to expand its business.
In a conference call, Chief Financial Officer Jim Keough said it planned retail expansion in key markets like Ontario. Unfortunately, Aurora Cannabis (NYSE:ACB) and Canopy Growth (NASDAQ:CGC) failed repeatedly to earn a profit in this region.
SNDL Stock: Opportunity
Sundial may outflank its competition. In addition to emphasizing premium inhalable products, the company will continue its cost discipline without sacrificing investments into the business. For example, it has a state-of-the-art 448,000-square-foot indoor facility. Its modular growing approach, called “small-batch-at-scale” will enable Sundial to produce a superior product.
Chief Executive Officer Zach George did not go in-depth to discuss its robust pipeline through additional strategic investments. This suggests that a deal is in the works for 2021. Management has a chance to invest its cash on hand to carve a robust niche in the cannabis market. Last year, it eliminated $227 million in debt by divesting assets and refinancing debt through equity swaps.
Sundial’s core brands are Grasslands, Palmetto, Sundial, and BC Weed Co. The wide range of prices per gram gives the company the flexibility to target the mainstream and the premium market.
Sundial wrote down some inventory in the last quarter. George said the costs were due to bringing greater efficiency to its cultivation processes. He expects a sharp drop in write-down events in the future.
Just as other cannabis firms face it, Sundial also experienced pricing pressures last year. For example, it saw prices for its 28-gram value pack drop by over 50% in the last year. This forced it to write down its inventory to reflect the weaker marketplace.
In the chart (courtesy of Stock Rover), Sundial shares have the worst value score. The company does not have a good historical sales growth rate. Its product development needs to bear fruit this year. Until that happens, the stock will score poorly on quality and growth, too.
Your Takeaway on SNDL Stock
Sundial does not have a bullish outlook from Wall Street analysts. The average price target is 74 cents. Three out of four analysts rate the stock as a sell, according to Tipranks.
Despite the near-term headwinds and warnings from analysts, the cannabis stock could pop again at any time just like it did in February. That would happen if speculators loaded up on cannabis names for a second time. If that does not happen, Sundial will need to announce an M&A deal that is accretive to quarterly results. Alternatively, overpaying for another cannabis firm will disappoint shareholders and send the stock to lows not seen since last year.
Disclosure: On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.