Sundial Growers (NASDAQ:SNDL) has been one of the less successful large Canadian marijuana companies. The company’s marketing and distribution strategy missed the mark, leaving it with unsold inventories and heavy losses. SNDL stock fell deep into penny stock territory as the company’s funds ran low.
However, Sundial found new life in 2021. Reddit’s r/WallStreetBets group latched onto the shares in January. At the time, it had the lowest share price of the major marijuana companies. Plus, it had high short interest. This made it an attractive target for a short-squeeze campaign. SNDL stock soon vaulted from 50 cents to as high as $4 a share.
While that initial short squeeze has now faded out, Sundial’s management took advantage. It issued a great deal of new SNDL stock to the public. In fact, it sold so many shares that the company has now taken care of its outstanding debt and has a massive cash pile to boot. This gives Sundial the chance to turn its business around. And it is doing so with a novel approach: Sundial is going to financing the marijuana industry.
The New Partnership
Earlier this year, Sundial announced that it had formed a joint venture with SAF Group. SAF, based out of Alberta, Canada, is an alternative asset manager. Previously, it has done work in a range industries, putting more than $2 billion capital to work across dozens of deals. Sundial agreed to partner with SAF for making investments in marijuana through a vehicle called SunStream Bancorp.
On its own, that might not sound like a huge deal. However, Sundial added to buzz recently. On April 23, it announced that it will be considerably upping its financial commitment, as it is now putting in 188 million CAD ($153 million) to the venture. That’s nearly double Sundial’s previous figure.
That may sound like an overly large investment. But don’t forget that Sundial has more than half a billion dollars saved up from all its recent stock offerings. The company has struggled to make any money actually cultivating cannabis. So deploying a ton of capital into financing the industry, if successful, could be much more successful than its previous ventures.
Indeed, it will also change Sundial’s investment profile. With any luck, investors will now view SNDL stock as much as a venture capital/cannabis equity fund as a traditional marijuana cultivator.
Innovative Industrial Could Be the Model
Innovative Industrial Properties (NYSE:IIPR) has been one of the best marijuana stocks of the past few years. It did so by charting a completely different path from the industry. It doesn’t cultivate or distribute marijuana on its own. Rather, it obtained access to cheap capital. In turn, it invested that into land and greenhouse facilities for marijuana production.
Since it is nearly impossible for marijuana growers to get bank loans in the U.S., capital is tight. Enter Innovative Industrial. It already has the greenhouses ready and can rent them out to the marijuana farmer, thus providing access to new state-of-the-art facilities without a large upfront investment on the grower’s part. IIPR stock has soared nearly 1,000% from its December 2016 initial public offering (IPO) price as it has fully taken advantage of this financing angle.
Now, it’s not certain what direction Sundial and its private equity partner will take. Laws are different in Canada, and so the same legal restrictions around banking that made Innovative possible in the U.S. don’t seem to apply in Canada. However, marijuana being a young industry, there should be investment opportunities for Sundial, either in Canada or internationally.
In any case, Sundial’s own marijuana operations haven’t worked, so this new direction gives investors something to be genuinely excited about.
SNDL Stock Verdict
This banking move is the most fascinating development at Sundial Growers in a long time. It’s clear that the company’s core marijuana business totally failed to take root. In fact, without raising at ton of money during the short squeeze, SNDL stock might not have even survived.
Now, however, Sundial is cashed up and has the resources to pivot the business model. If it can follow in Innovative Industrial’s footsteps, SNDL stock could be an amazing turnaround story still in its early stages. That’s a lot to ask of the company, but the potential is now visible.
I want to stress that SNDL stock is still extremely risky at this point. There is scant tangible evidence yet that this new investment angle is going to succeed. But it’s at least a bold new direction that could breathe life into an otherwise floundering business.
Sundial needs to show a lot more before this would become a high-conviction opportunity. But, for the first time in a long time, there is some reason to be optimistic on SNDL stock shares going forward.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.