The year has not been kind to cannabis producer Sundial Growers (NASDAQ:SNDL). After an amazing but volatile 2020, SNDL stock is down 25% in the last month.
It seems the Reddit-induced rally is finally losing steam. Shares are still up 73% year to date and have handily beaten the S&P 500. But the writing is on the wall. Company-specific catalysts are few and far between for Sundial. And that will ultimately lead to an evaporation of any long-term gains.
The company has disappointed Wall Street analysts’ consensus earnings estimates every time in the last six quarters. And even though most of the world was quarantined last year due to the novel coronavirus pandemic, the top line did not improve.
In addition, you get a sense that the company is still evolving. It has a lot of cash from share issuances. However, up until now, there is no major M&A activity to speak of, and it’s difficult to see exactly what makes SNDL stock stand out in its peer group. On top of that, shares are trading at 24.37 times forward price-to-sales.
All in all, Sundial Growers is not realistically valued on fundamentals. Management has done well to restructure debt and build up cash. But without a sound strategy, that position will whittle away as well.
SNDL Stock Needs a Growth Story
Reddit-fueled hype pushed SNDL stock almost $4 a share, but the momentum is now fading.
Shares lost considerable value last month as investors take their profits and invest in other more attractive niches. However, when it comes to the current market, all bets are off.
Hence, even if SNDL stock looks like a bad investment, many investors will still be skeptical of selling off their stake due to the WallStreetBets subreddit. Look no further than what happened to GameStop (NYSE:GME). It was the quintessential Reddit stock, but it started losing some of that luster recently.
However, those who thought the Reddit rally was over were in for a rude awakening. GME stock is up 761% year-to-date, and each time it seems down for the count, Redditors rush in and pump it up again.
So there must a segment of investors who will think that another bonanza may be around the corner.
But as the saying goes, “Hope is not a strategy.”
The fact remains that Sundial is struggling, and will continue to, unless they employ a coherent turnaround strategy.
As of the last reporting date, cash and cash equivalents stood at $47.4 million. The company sold 741 million shares for gross proceeds of $557 million to get to this point.
Dilution has become a necessary evil in the Canadian cannabis sector. However, even by most conservative estimates, the amount of shares issued by Sundial is massive.
Now had the company made some accretive acquisitions during this time, shareholders would have stomached the whole thing. But since we have no updates on that end, many are left scratching their heads.
Meanwhile, operating performance continues to be abysmal. In the fourth quarter, the cannabis producer reported a net loss of 64.14 CAD. Sales came in at 13.58 million CAD, a minor jump of 5.3% sequentially but still missing analyst estimates.
The company managed to sell 23,500-kilogram equivalents of cannabis for the year, a 36% year over year increase from 17,293-kilogram equivalents. Now, this is a year when most companies experienced explosive increases to their top line.
The only silver lining in the latest earnings report was branded sales, which increased to 75% of total cannabis sales in 2020 from 20% in the previous year.
If the company is to do well in the future, it will have to continue pivoting towards branded retail sales. But it’s up against established brands like Canopy Growth (NASDAQ:CGC) that have a sizeable war chest.
Analysts tracked by Refinitiv are forecasting consensus growth of 11.5% and 47.1% in revenues for 2021 and 2022, respectively. By most standards, that is very conservative and does not justify a valuation of $1.96 billion.
There Are Better Options Available
Optimism toward U.S. federal legalization has pushed several cannabis stocks to unprecedented heights, last seen only when Canada legalized recreational use of cannabis.
However, that does not mean every stock has the same risk-return tradeoff. With limited revenue prospects, lackluster operating results, and a dearth of positive catalysts, SNDL stock remains very risky despite plunging from its near $4 high.
Against this backdrop, I would advise investing in an ETF like AdvisorShares Pure Cannabis ETF (NYSEARCA:YOLO) or Cannabis ETF (NYSEARCA:THCX). Both these ETFs have done very well in the last year and provide safety and security against the volatility of this sector.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence.