Sundial Growers (NASDAQ:SNDL) is giving bulls plenty of reasons to rejoice. Year to date, SNDL stock is up 70%, handily outpacing the cannabis sector and the S&P 500. As a meme stock, many will be skeptical of investing money in Sundial Growers. But at this point, the bulls are firmly in control.
There are plenty of reasons to smile if you are long on this one.
Sundial Growers has acquired Inner Spirit, a Canadian cannabis retail chain. Meanwhile, it is also moving forward with its joint venture with SAF Group to finance cannabis opportunities worldwide.
And finally, the Canadian cannabis company had a relatively better first quarter recording their first positive adjusted EBITDA and revenue from cannabis operations and income from capital investments.
Interestingly, income from strategic investments now outpaces income from cannabis sales. This segment will become vital to the company’s long-term prospects moving forward.
However, Sundial is not out of the woods yet. It remains an unprofitable company that saw its sales drop 36.4% over the last year, a time when most people were sheltered in their homes with little to do, and the U.S. saw record cannabis sales.
Considering all these factors, value investors will want Sundial to show more financial strength. There are positive catalysts, yes, but improved financial operations are necessary.
Granted, Sundial has a lot of cash at its disposal. But the issue is where all that will go. If the cannabis producer invests excess cash into ailing cannabis companies, no Reddit interest can save this one.
SNDL Stock Has Many Positive Upside Catalysts Ahead
For several value investors, SNDL stock is finally starting to look attractive. In the first quarter, the company posted positive adjusted EBITDA, the first time in its history, despite a 29% decline in revenue. Its net loss of $134.4 million is due to a non-cash charge. This stemmed from the accounting valuation of derivative warrants.
The other major thing to note is liquidity. On May 7, the company had $1.08 billion unrestricted cash, marketable securities, and long-term investments on hand, with no outstanding debt. That’s nothing to scoff at, considering how important the capital investments segment will become for the company moving forward. Granted, much of this capital has come in the form of stock issuances. But still, you cannot fault management for taking advantage of the situation.
We will have to see how the Inner Spirit Holdings and Spiritleaf Retail Cannabis Network acquisitions will work. Management is tight-lipped so far. But the acquisition should open up new markets and improve their financial results.
According to Sundial’s May 2021 corporate presentation and Inner Spirit’s Q1-2021 management’s discussion, Inner Spirit owns 19 corporate retail cannabis outlets and earns income from 67 franchise cannabis retail outlets. The company intends to open 30 new stores in 2021 and expand on the 2.3 million customers served in 2020.
Finally, my colleague Chris Lau brought up two interesting points in his article on the company. SNDL is now making strategic changes. It has limited the offering of discount products, putting an end to diminishing margins. The company is also concentrating on the premium inhalable market through which it can create a niche by steering clear of the mainstream or discount market.
And of course, we already know it is aggressively targeting investments in the cannabis space. These are all positives that bulls can tout when they are following the Reddit momentum and investing in this one.
Plenty of Risks
With more than $1 billion in cash, Sundial has plenty of options. But there is a need for caution. The company is no spring chicken. It was founded in 2006 and went public on Aug. 6, 2019. Although the stock has skyrocketed, there is nothing much to show in terms of profits.
The global cannabis market still needs greater federal legalization on the U.S. front to succeed. But that will not happen overnight. Sundial needs to pick its spots effectively. Posters on the popular Reddit forum r/WallStreetBets, instrumental in fueling the stock-market frenzy, can always turn their attention towards other stocks.
If the company purchases poor-performing cannabis companies, it will lead to an even higher net loss. Against this backdrop, the prospects of the company remain unclear.
Moving the Needle
One has to give credit where it’s due. Sundial has been making the right moves in the last few months. It does not, however, justify its massive rally.
Institutional interest has dropped sharply for this one. The fate of this company is in the hands of retail traders. Having said that, the company is slowly moving to the buy category for me because of the aforementioned factors. Again, trade SNDL stock wisely because it’s still a spec play at this stage.
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On the date of publication, Faizan Farooque 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.
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. His passion is to help the average investor make more informed decisions regarding their portfolio. Faizan does not directly own the securities mentioned above.