Expect a Less Wild Ride for Sundial Stock in the Months Ahead

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What’s the next move for Reddit’s favorite pot play, Sundial Growers (NASDAQ:SNDL) stock? The shares of this Canada-based cannabis company traded wildly earlier this year. In January and February, hopes that the U.S. Congress would legalize marijuana, coupled with “meme stock mania,” sent it soaring as much as seven-fold.

SNDL stock
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But since then, it’s fallen to prices not too far above where it was before the hype first took hold. Back to trading for less than $1 per share, the stock looks as though many expect it to decline some more.

At first glance, that makes sense. For starters, using traditional metrics, the valuation of SNDL stock  looks frothy. Not only that, but as an “also-ran” pot company, it’s a much lower-quality name than, say, Canopy Growth (NASDAQ:CGC). Yet it has several factors at play that could give it an unexpected boost. One such key factor is  its war chest of cash that it could put to productive use.

Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.

But that by itself probably won’t help the stock rally much above  its current levels. Instead, much of its potential still hinges on progress towards U.S. federal pot legalization. Until then, expect a less wild ride for this former roller-coaster stock.

What’s Working (and Not Working) for SNDL Stock

With its unique position as a penny pot stock that trades on the NASDAQ exchange, it’s easy to see why this stock became popular with the r/WallStreetBets community. But the “Reddit effect” is no longer as strong as it once was, and fundamentals are becoming the main driver for stocks’ price action.  There are certainly many negative aspects of that change for Sundial.

And the still-inflated valuation of its shares is unfavorable. Although analysts, on average, expect its 2021 sales to come in slightly below $5o million, the company’s market capitalization is $1.35 billion.

But Canopy’s turnaround remains a work in progress. As InvestorPlace columnist Dana Blankenhorn recently wrote, Sundial continues to operate deep in the red. But it does have a positive attribute that helps to counter those negatives.

The company’s many secondary stock sales diluted its shareholders. But, as a result of these offerings, the company is now flush with cash. According to a recent press release, it has around $1.08 billion CAD, or about $894 million, in its coffers. There’s no guarantee that it’ll put the cash to work in profitable initiatives. But being cash-rich but unprofitable is a whole lot better than being cash-strapped and unprofitable.

Sundial is far from being the best pot stock out there, and interest in the stock’s previous main catalyst- legalization of marijuana by the U.S. federal government — has waned. But that catalyst is still in play, and it’s still the main thing that could put the shares into hyperdrive once more.

Its Longstanding Potential Catalyst Remains in Motion

I’ve long used the term “legalization lottery ticket” to describe SNDL stock. I mean that the stock could generate outsized gains once Congress legalizes marijuana.

Many have given up on that happening anytime soon. But the odds of legalization in the near-term may not be so slim. Sure, President Biden may only support decriminalization, not full legalization. But, as Senator Cory Booker argued in an interview last month, decriminalizing it on the federal level could produce the same result as full legalization.

In other words, pot could become like sports gambling, with each state deciding whether to legalize the drug and the federal government placing few restrictions on it. That could pave the way for Canada-based companies like Sundial to enter the American market. In short, President Biden may not block that catalyst. That sounds good, but are there enough votes in Congress for decriminalization?

That’s a good question. The Democrats control Congress, but they do not have a filibuster-proof majority in the Senate. That means they’ll need about ten Republican senators to be on board with decriminalization.

Yet, as I recently noted, the issue is becoming increasingly bipartisan. Fears that pot reform remains many years away may be overblown. And any progress on this issue could result in an epic move for SNDL stock.

Sundial Is Still Mostly a Legalization Play

Sundial may seem to be more hype than substance, but its situation may not be as bad as it looks on the surface. Although the company’s valuation and profitability are concerns. its cash position could be enough to make up for deficiencies in those areas.

The bottom line, however, is that SNDL stock will likely hold steady until Congress makes progress on legalizing pot.

On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Thomas Niel, a contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.


Article printed from InvestorPlace Media, https://investorplace.com/2021/05/sndl-stock-expect-a-less-wild-ride-months-ahead/.

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