Sundial Growers (NASDAQ:SNDL) are expected to report first-quarter results on May 11 after the markets close. If its results are as lackluster as they were in the fourth quarter, investors can expect SNDL stock to fall below 50 cents, where it traded at the end of 2020.
Thanks to a 60% gain year-to-date, Sundial’s market capitalization is an eye-popping $1.7 billion based on an estimated 2.18 billion shares outstanding.
Sundial is located in Calgary, Alberta. It also happens to be the headquarters of High Tide (OTCMKTS:HITID), a vertically integrated cannabis company whose biggest asset would likely be its 85 cannabis retail outlets across Canada, including Canna Cabana and KushBar, as well as its various e-commerce sites, including Grasscity.com and SmokeCartel.com.
Based on 675 million shares, it has a market cap of just $344 million as I write this. That’s one-fifth the value of Sundial.
Is it possible that Sundial isn’t even the best Calgary-based cannabis company, let alone Canada or North America? I think so.
Dilution Has Killed SNDL Stock
Before I get into some of the things you might find intriguing about High Tide and its business model, let’s consider Sundial’s share issuance history.
My biggest concern was that given it was now debt-free, it would go after a splashy acquisition with some of the 62 million CAD ($50.4 million) it had on its balance sheet from its recent stock sales. Or worse, further dilute its shareholders.
Consider that at the end of 2019, Sundial had 107.2 million shares outstanding. Assuming you owned 10% of its shares at the end of Q4 2019, today, you would own slightly less than 5% of its stock.
That’s not cool. And it could get much worse.
How Does High Tide Compare?
Well, as of the end of January, it had a trailing 12-month (TTM) revenue of 107.9 million CAD ($87.7 million) with a 39% gross margin. Sundial had net revenue of 60.9 million CAD ($49.5 million) in 2020 with a gross margin of -82%.
Now before you freak out, I realize that we’re not talking apples and oranges here. Like the oil and gas business, cannabis has upstream, midstream, and downstream markets. High Tide participates in the downstream market, while Sundial is a licensed producer participating in the upstream market.
The important thing to remember here is that successful investing is finding well-run companies with sustainable growth and capable of producing long-term profits. It doesn’t matter whether they’re upstream or downstream, just that they’re good.
From where I sit, High Tide seems ideally positioned to be a leader in Canadian cannabis retail. I live in Nova Scotia on the east coast of Canada. Cannabis in this province is retailed through stores (24 of them) run by the Nova Scotia Liquor Commission, a provincial Crown corporation.
Next door in New Brunswick, the cannabis stores are also operated by a provincial Crown corporation. Recently, the provincial government decided to cancel plans to sell its stores to a single buyer through a bid process. It’s very conceivable that private stores will be encouraged to open at some point in the future to provide healthy competition for the government-run stores.
So, even in places that are so-called “control” provinces, the possibility for High Tide expansion remains alive and well.
The Bottom Line
I decided on this angle for my article after seeing High Tide’s May 3 press release that announced its acquisition of 80% of Fab Nutrition LLC for $20.6 million. It has a three-year option to buy the remaining 20%.
Fab Nutrition is a producer of hemp-derived CBD (cannabidiol) products sold online in the U.S. In 2020, it had sales of almost $11 million and $4.3 million EBITDA (earnings before interest, taxes, and depreciation). It has high gross (74%) and EBITDA (40%) margins and, if you’ll pardon the pun, is growing like weeds.
The move expands its U.S. footprint in a sensible and relatively inexpensive manner.
From now on, when I look west to the prairies, High Tide will be my first cannabis choice in the Southern Alberta city, not Sundial Growers.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.