Sundial Growers (NASDAQ:SNDL) is an attractive penny stock that also has an increasing short interest. That’s one reason that makes SNDL stock worth considering at current levels of 97 cents.
As the Reddit army continues to grow, penny stocks have remained in focus.
At the same time, retail investors have been targeting stocks that have a high percentage of shares shorted. The short squeeze rally has the potential to deliver multi-fold returns in a short span of time.
However, SNDL stock is not a pure speculative bet. I believe that some medium to long-term exposure can be considered to the cannabis stock. This column will highlight some of the fundamental factors that make Sundial worth considering.
At the onset, there are increasing hopes of Federal level legalization of cannabis in the United States. Progress on that front can spark a rally for all cannabis stocks.
Sundial might not have presence in the United States yet, but the company is well positioned financially for making some big investments.
Recent estimates suggest that the global CBD market will be worth $2.7 billion in fiscal 2021. Further, the market is expected to grow at a CAGR of 51% through 2030.
By the company’s own estimates, the global legal cannabis market is likely to be worth $47 billion by 2025.
Clearly, with a multi-year industry tailwind, I would be tempted to invest in a company that is positioning itself for strong growth.
Big Cash Buffer and SNDL Stock
I believe that Sundial is at a growth inflection point. A key reason is the fact that the company has a cash buffer of $873.5 million. This gives it flexibility to invest in organic and inorganic growth.
Currently, Sundial has a portfolio of brands with a focus on inhalables as opposed to edibles. The company has already accelerated investment in its sales team. This will help in increasing the distribution network through Canada.
Healthy revenue growth is likely in the coming quarters from the in-house brand portfolio.
An important point to note is that for Q1 2021, the company’s branded cannabis sales mix was 74% of sales. As the weight of branded products increases, it’s very likely that EBITDA margin will improve.
For Q1 2021, the company invested $96 million in cannabis related portfolio investments. This generated revenue of $15.7 million. It’s very likely that the company will continue to invest in global cannabis related opportunities.
As a matter of fact, Sundial already has a joint venture with SAF Group. The JV intends to invest in debt, equity and hybrid instruments globally. Sundial has committed $188 million towards this JV.
Therefore, revenue from investments will accelerate in the next 12-24 months. This will support EBITDA upside and cash flow growth. As of May 2021, the company already had $76 million in marketable securities and $254 million in investments.
Additionally, I wouldn’t be surprised if Sundial continues to pursue acquisitions. Recently, the company acquired Inner Spirit Holdings, which has 86 stores in operation in Canada.
These stores can potentially be used to expand the visibility of the company’s own brand of products. The acquisition will be completed by Q3 2021. Therefore, the impact of the acquisition on growth is likely to be visible in 2022 and beyond.
Concluding Views
It’s possibly a make-or-break time for SNDL stock. The stock price trend largely depends on the company’s utilization of the cash buffer.
One or two strategic investments or acquisitions that have the potential to create long-term value can send SNDL stock flying.
I am optimistic considering the company’s partnership with SAF Group and the efforts to increase its own brand visibility.
Further, strategic investments and investments in marketable securities is likely to boost recurring cash flows.
Therefore, it makes sense to remain invested in SNDL stock. I would not be surprised if the stock breaches the previous highs of $3.96 in the next few quarters.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.
