It has been a volatile year for Sundial Growers (NASDAQ:SNDL) stock. Sundial is up nearly 70% since the beginning of the year, but at point in February SNDL was sitting on a mammoth 520% return.
Unfortunately, it’s given nearly all those gains back.
Shares of Sundial Growers began 2021 around 50 cents. Then it became a trendy pot name after traders on the Reddit r/WallStreetBets forum took an interest in SNDL stock back in February, making it a meme stock overnight. The company was also buoyed by hopes for federal legalization of cannabis under President Joe Biden’s administration. Many marijuana stocks like Sundial have also been on fire due to the bullish bets of traders on the Reddit platform.
Yet those February highs now feel like a distant memory. SNDL stock has been declining steadily since reporting earnings in March and the Reddit-driven daily hype faded. But the shares still generate considerable interest among penny stock investors.
Therefore, today I’ll take a closer look at what might be next for Sundial Growers in the rest of the year. If you are currently a shareholder with paper profits, you might want to ring the cash register. Given its fundamental metrics, a long-term investment in SNDL stock is a risky proposition.
Here’s why.
How Q4 Earnings Came
In mid-March, Sundial Growers released mixed Q4 and full-year earnings. Gross revenue went up by 10% to 73.3 million CAD in 2020. Fourth-quarter net cannabis revenue was 13.9 million CAD, up 8% sequentially. Net loss from continuing operations for 2020 was 206.3 million CAD in 2020 compared to 142.7 million CAD a year ago.
Management has been transitioning from wholesale to branded retail sales. In 2020, branded net cannabis sales increased to 75% of total cannabis. A year ago, it had been 20%. But analysts raised eyebrows as the results of the transition were not robust. In 2019, the average gross selling price per gram equivalent of branded products had been 6.24 CAD per gram. Yet in 2020, it was 5.05 CAD per gram.
Similarly, adjusted gross margin for the year ended Dec. 31, 2020 was $9.2 million CAD, compared to $16.8 million for 2019. Investors were not pleased with the decline.
Regular InvestorPlace.com readers would be well versed with the fact that cannabis companies suffer from lack of profits. Sundial Growers is no exception. Over the past year, management has been cutting costs. In 2020, sales, marketing and general expenses were reduced 20% from 47 million CAD to 37.8 million CAD. But it is still burning cash at levels that are not matched by revenue numbers. The company offered no clear road map to achieve profitability. Therefore, SNDL stock has been declining since the release of earnings.
Another point of concern has been the massive share dilution due to equity increase. The inflated SNDL stock price enabled the company to raise capital easily. About a year ago, the company had about 100 million shares outstanding. Now, it has 2.18 billion. As a result, the company has paid all of its debt and is left with over 700 million CAD as per the quarterly metrics. Its market capitalization stands close to $2.1 billion. However, the company’s current revenue does not justify such a valuation level.
The Bottom Line on SNDL Stock
Sundial Growers has not made much progress in getting to a positive bottom line. And in spite of the recent pullback in price, SNDL stock is still expensive and remains a volatile small-cap company. Its price-sales and price-book ratios stand at 4.2 and 7.3.
The retail market in Canada is not large enough to accommodate the number of marijuana companies we have at this point. It is not certain if and when federal legalization might happen in the U.S. What is more, given the increases in marijuana shares since the U.S. presidential election in November, any potential good news has already been factored into these shares, including SNDL stock.
Thus, May could easily become the month when investors could decide to sell SNDL stock and go away. Unless you are a day trader who realizes the risk/return profile of short-term trading, then you should possibly stay away from Sundial stock.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.
