Sundial Growers (NASDAQ:SNDL) stock remains one of the most controversial penny stocks out there. Sundial is a small unprofitable cannabis company trading just under a dollar per share. Normally, that sort of company might fly under the radar. But SNDL stock has become an oddly captivating battleground all year.
Last fall, SNDL stock was trading around 25 cents per share and generating huge operating losses. Analysts were suggesting that the company faced bankruptcy risk. Things looked bleak.
Then the Reddit traders arrived. Given Sundial’s low share price and large short position, it squeezed with ease, and briefly hit $4 in February.
Sundial Is Cashed Up, But With Massive Dilution
The company took advantage of this run-up to issue a gargantuan amount of stock. So much, in fact, that it paid off its debts and ended up with a billion dollars of cash left over. It was an incredible move.
However, Sundial also ended up with an enormous amount of outstanding stock; it has more than 1.6 billion shares outstanding at this time. This means it has a market capitalization of $1.5 billion as well given the current share price.
Traders are also buying and selling more than 200 million shares of SNDL stock daily on average. That’s an amazing amount. So don’t mistake the low share price as a sign of a good value or that Sundial is an overlooked stock.
Sundial’s Low Share Price Distorts Its Fundamentals
If Sundial did a large reverse split, it would lose much of its unique trading appeal. For an example, let’s compare this to fellow marijuana firm Cronos (NASDAQ:CRON). Cronos, like Sundial, has struggled to generate much in the way of profitability or consistent commercial success.
Cronos has a market cap of $3.3 billion, or roughly twice that of Sundial. Additionally, Cronos also has 11% of the stock sold short, so it would make sense as a short squeeze target. Yet, Cronos gets relatively little buzz on social media, and you can see it in the trading volume. Cronos trades just 1.5 million shares per day on average. That’s a pale shadow compared to Sundial’s 200 million share daily volume.
Why aren’t traders interested in CRON stock? I’d argue it’s because CRON stock sells for $9 per share, whereas SNDL stock is at just $1.
Yet, nominal share price doesn’t really matter as far as a company’s long-term fundamentals go. If Sundial did a 10:1 reverse split, it’d maintain the exact same business prospects, but now it would have a $10 stock price instead of $1. At that point, would traders still prefer $10 SNDL stock to $9 CRON stock? Put another way, meme traders seem drawn to Sundial merely because it looks cheap. But, when you actually consider the huge amount of dilution, Sundial’s appeal fades considerably.
Sundial Is Trying To Pivot
Sundial’s existing retail cannabis business failed to launch as anticipated. The company ran into various problems with operations and meeting consumer demand. It remains to be seen if the current management team can fix these structural issues or not.
However, with its massive cash pile, Sundial isn’t just stuck with its struggling operations. For one sign of a new direction, Sundial invested heavily in a venture that will finance cannabis operations. This makes the company something of a specialty lender, which seems more promising than the company’s retail marijuana business.
Given that Sundial has nearly 40 cents per share in cash, it seems weird that short sellers remain so fixated on SNDL stock. The company isn’t going to zero anytime soon. Meanwhile, with its extensive treasury, Sundial could announce a transformative merger or acquisition and shake things up.
Sundial is a pretty lousy business judging by its past results, there’s no disputing that. But with a ton of cash, that could change at any time if management comes up with something clever.
SNDL Stock Verdict
You can make a decent case for Sundial Growers as a trade. For a meme stock, the underlying fundamentals here aren’t bad. The company’s massive cash position in particular gives it a bunch of options that rival marijuana companies may not have.
That said, it feels like an exercise in futility analyzing the fundamentals at this point. Because it’s not going to be changes in the company’s outlook that drive short-term price action. Rather, the pivotal question for SNDL stock’s current outlook is whether or not another short squeeze kicks off. And that’s more up to the social media and Reddit crowd to determine than anything that happens in the marijuana industry or with Sundial in particular.
As such, the takeaway is that SNDL stock is all right for a speculative roll of the dice. The company’s gigantic cash holdings insulate shareholders from too much downside in the short term. For long-term investors, however, it’s probably best to wait for the meme energy to move elsewhere so that SNDL stock can start to trade based on its actual underlying value once again.
If nothing else, please look beyond the $1 stock price. SNDL stock isn’t necessarily “cheap” simply because it’s a penny stock.
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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.