Sundial Growers (NASDAQ:SNDL) stock is not having a great summer. After shares leapt to $4 in February, Sundial has been in a declining trend. In April, SNDL stock fell back below the $1 mark, and it has struggled to maintain any momentum since then.
Traders on Reddit’s r/WallStreetBets forum gravitated to the company earlier this year, but it appears the buzz has largely worn off.
That said, under the surface, the outlook for Sundial has changed dramatically. It’s no longer a pure player on producing its own cannabis and selling to consumers.
With all the cash Sundial raised from its numerous stock issuances, the company is seeking to broaden its business model. This could pay dividends for patient shareholders.
A Company In Transition
Back in May, I explained how Sundial’s move into cannabis banking could turn the company around. Sundial failed to find success producing and marketing cannabis for the Canadian market. That’s understandable. It was a crowded market, and numerous companies have struggled. SNDL stock fell well below a buck as people wondered if Sundial would go bankrupt.
However, the short squeeze changed everything. Sundial raised so much cash from stock issuances that it paid off its debt and held approximately 1 billion CAD as of last quarter. That’s a ton of firepower.
Sundial is investing this in various ventures. For example, Sundial recently purchased a chain of retail stores. However, the most interesting angle is on the banking side of things.
Sundial’s Financial Arm Makes a Move
Not too long ago, Sundial set up a financing arm to lend to other cannabis companies. Recently, it announced a deal with Clever Leaves (NASDAQ:CLVR). An affiliate of Sundial is lending Clever $25 million at a 5% interest rate. However, this loan is also convertible into CLVR stock at $13.50 per share. Thus, if Clever Leaves stock blasts off (it currently trades at $10), Sundial would earn a major capital gain on its investment while collecting interest in the interim.
There’s a lot to like about Clever Leaves. The company is a global marijuana producer focused on cultivation in the nation of Colombia. Colombia has already proven itself as an agricultural export leader. Fly into the Medellin airport and you’ll see greenhouses on all sides as you approach the runway. These greenhouses produce fresh flowers to be exported for events such as weddings and funerals.
Marijuana is a natural addition to Colombia’s leading position in this type of agriculture. Colombia’s climate is conducive to marijuana and labor costs are much lower than in North America.
Sundial, by funding Clever, is doing something unique from most marijuana companies. Instead of taking the risk on growing marijuana itself in this venture, it is setting up a royalty-type stream. It gets interest from Clever Leaves as that firm commercializes its operations.
And if Clever succeeds in a big way, Sundial gets to participate in the equity upside. This is a tried and true model in the gold mining industry, where royalty companies lend capital to fund new mines and participate in the gains if the project really takes off.
SNDL Stock Verdict
It’d be easy to look at this loan and say it’s no big deal. After all, Sundial is only putting in $25 million of capital here. So even if Sundial’s loan ends up generating large upside, it won’t really move the needle for SNDL stock. That’s a fair counterpoint.
However, investors should look at this as a sign of Sundial’s shifting priorities. Sundial’s old business model around commercializing its own cannabis. This didn’t work as intended. Now, the company may be pivoting to a cannabis royalty option. Historically, royalty business models have often proven much more profitable in industries such as mining than actually doing the underlying operations itself. If a similar dynamic develops in the cannabis space, SNDL stock could be one of the beneficiaries.
That said, it will take months or probably years to build out a full-scale cannabis royalty business. Sundial will need to assemble various deals like this to get a diversified and strongly profitable portfolio.
In other words, people trading SNDL stock for the meme and short squeeze angle won’t see any real impact from the Clever investment. For longer-term holders, however, Sundial’s turnaround is looking more and more plausible.
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On the date of publication, Will Ashworth 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.
On the date of publication, Ian Bezek 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.
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.
