Sundial Growers (NASDAQ:SNDL) is a favorite penny stock in play. The cannabis firm posted first-quarter results that suggest potential upside on the way.
SNDL stock could continue a sustained uptrend as a result. Conversely, investors may avoid this company due to a sudden share spike to an unsustainable $3.96 high in February. That was because of the WallStreetBets induced short-trading madness at the beginning of the year. Now that the short float is 13.8%, Sundial’s prospects depend on its fundamentals.
First Quarter To Lift SNDL Stock
Sundial posted positive EBITDA despite a 29% decline in revenue. It earned $1.7 million from operations, compared to a $32.7 million loss in the prior quarter. Its net loss of $134.4 million is due to a non-cash charge. This stemmed from the accounting valuation of derivative warrants. The positive adjusted EBITDA of $3.3 million is a first in Sundial’s history.
In its press release, Chief Executive Officer Zach George highlighted Sundial’s strong financial position of $1.08 billion. It has a unique cultivation facility, too. The company is building a platform that targets attractive capital deployment opportunities, including improving its cultivation outcomes. Furthermore, Sundial reset its business to face the ongoing decline in Canadian cannabis flower pricing. It limited the offering of discount products. That will put an end to eroding margins.
Sundial is focusing on the premium inhalable market. This should lead to improving quarterly results in the second half of 2021. More importantly, by avoiding the mainstream or discount market, the company will carve a moat in a select market. It will tailor to customer needs. This will lead to higher repeat customer business, sustainable margins, and profitability.
Since the beginning of this week, SNDL Stock reached a blistering height it hasn’t seen in several months, raising almost 100% over the past 10 days. Speculators who traded the stock a few months before that for a quick gain are largely gone. In a five-year discounted cash flow growth exit model, assume a perpetuity growth rate of around 7%. This model uses the Perpetuity Growth formula (also known as Gordon Growth) to calculate Terminal Value after five years.
The forecast leaves room for Sundial to post revenue unchanged from last year. From there, it must grow in the 15%-55% from 2022-2025. That is achievable as long as it keeps posting positive EBITDA in the future quarters.
On its conference call, CEO George said it would give investors more details on its Inner Spirit Holdings and Spiritleaf Retail Cannabis Network acquisitions. For now, investors may assume the acquisition will lead to cost rationalization and organic revenue growth. Inner Spirit created a differentiated franchise-based retail network. It uses data-driven consumer insights to help it derive sound business decisions. The combined firm should open up new markets, raising the revenue potential.
Growth by Acquisition
Sundial will lower the cost structure of Spiritleaf. It will leverage its partnerships to seek growth opportunities. The CEO mentioned on the call that peers are effectively moving away from cultivation. And since he recognizes this is a commodity business, Sundial needs to become a low-cost structured business. Additionally, inhalable products are central to the premium segment.
Sundial will have small-budget scale facilities that limit costs. As it expands, it cannot allow cultivation costs to grow faster than revenue.
Wall Street is not convinced that Sundial has a sustainable business. Based on three analysts who offer price targets, the 12-month target is 85 cents (according to Tipranks).
Sundial is worthwhile speculation for cannabis investors. The penny stock is often the most actively traded stock by share count. The strong liquidity on the markets will give investors plenty of trading opportunities. Investors should treat the stock as a rental instead of a buy-and-hold. The company still needs this year at the very least to post meaningful profits. Its positive EBITDA is a good start but it will need more than that. Accelerating revenue and falling costs will win back the serious long-term investor.
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On the date of publication, Chris Lau 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.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.