Sundial Growers (NASDAQ:SNDL) stock hasn’t been able to buck the downward pressure in the markets. Since mid-March, SNDL stock has gone from $1.61 to around $1.10. The market capitalization is now at $1.8 billion.
Leading up to this, SNDL was very much in bull mode. After all, in September the shares were trading for a mere 14 cents!
There was also the positive impact of the election of President Biden. The belief is that he will help to loosen the restrictions on the cannabis industry.
So with SNDL cheaper, is now a good time to consider a purchase? Or maybe it’s still best to hold off?
Let’s take a look.
A Closer Look at SNDL Stock
Sundial, which got its start back in 2006, is a licensed cannabis producer based in Alberta, Canada. The company has an assortment of brands including Palmetto, BC Weed Co and Topleaf, and operates a 470,000 square foot facility.
One of the ongoing issues for SNDL stock has been its balance sheet, but with the surge in the share price, the company has been aggressive with its financings. The result is that it eliminated a hefty $227 million in aggregate principal debt. There is also about $719 million in unrestricted cash on hand (as of March 15, 2021).
Despite this, there is another nagging issue – growth. In the latest quarter, the gross revenues rose by only 10% to $73.3 million on a year-over-year basis. Much of this was due to the transition of the product line to branded offerings, which currently represent three-quarters of overall revenues.
Even though the Canadian cannabis industry has been moving away from cultivation, this has not been the strategy for Sundial Growers. The company believes that its modular indoor facility can better adapt to changing market conditions.
“We are excited to see progress, and these changes have accelerated improvements in quality, potency, yield, and cost,” said CEO Zach George, on the earnings calls. “During Q4, we saw the highest average potency in terpene profiles at harvest in Sundial’s inception.”
In the meantime, the company has been reducing its costs. To that end, the general and administrative expenses fell by 18% in 2020 to $32 million.
While all this is good, the fact remains that the Canadian market is intensely competitive. Rivals include top operators like Tilray (NASDAQ:TLRY) and Canopy Growth (NASDAQ:CGC). For Sundial Growers, it really has been tough to stand out among the crowd – and this could mean that growth will remain under pressure.
But what about the U.S. market? This is certainly an opportunity. And Sundial Growers does have the resources to pursue it.
Yet investors should still temper expectations. It does look like the Biden Administration is more focused on infrastructure, not cannabis legislation. In other words, it could take some time for the market to get traction.
Bottom Line on SNDL
Perhaps the biggest issue with SNDL stock is the valuation. Consider that the shares are trading at over 5 times revenues.
Wall Street analysts are also skeptical. The price target is about 74 cents a share, which assumes 32% downside from current levels (according to TipRanks).
I think the prospects for the cannabis industry are quite positive. There is certainly a secular growth story at work. A better approach may be to focus on those companies with more scale, diverse operations, and strong brands like Tilray or Canopy Growth.
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s.