Meme trading has thrown the proverbial stock trading rule book out of the window, generating widespread interest buzz in the market. It is being dubbed as the new-age casino gambling, as the classic meme mold continues to evolve. Canadian marijuana producer Sundial Growers (NASDAQ:SNDL) is one of the latest targets of the retail trading frenzy. However, SNDL stock remains a speculative bet, with a relatively weak operation and growth outlook.
SNDL stock was among the long list of cannabis stocks that benefited from the broad-based sector rally at the start of 2021. This relates to the period of frenetic trading right after President Joe Biden’s win in the U.S. election. However, the market has since cooled down considerably, with several cannabis stocks witnessing a substantial drop in prices.
SNDL stock remains a difficult one to assess, given its past failures and the uncertainties regarding its investments. It would be best to invest in a high-quality U.S. multistate operators to gain exposure to the tailwinds in the sector.
Dismal First Quarter Results
Sundial has done well to shore up its finances, thereby solidifying its balance sheet positioning. However, the primary concern for its investors is its top line, which slowed considerably in the past few quarters.
Sundial generated 9.89 million CAD in sales during the quarter, representing a substantial 29% drop on a year-over-year basis. It sold 3,989 kilograms of cannabis in the quarter, a 45% drop on a sequential basis.
Additionally, gross margins turned negative as it tried to liquidate its stock at a loss. As a result, it reported a net loss of 134.45 million CAD.
The company’s management has gone to great lengths to explain the torrid time it has had during the year. Price compression and oversupply were two main reasons for the company’s horrible showing. Based on the management’s comments, it’s evident that it sees a difficult period ahead for the cannabis market and feels it would be tough to maintain sales.
Looking ahead Sundial, will be focusing on its investments and shrinking its cannabis for now. Only time will tell whether it can compete with other companies in terms of product quality and costs, which have led to negative margins.
Strategic Expansion
Sundial has a massive cash pile on its hands and has been highly active on the merger and acquisition front.
First, it invested roughly $22 million for a 19% ownership stake in a small LP called Indiva. Second, it announced it would be acquiring Canadian cannabis retailer Inner Spirit. Moreover, it has invested $59 million in a special-purpose vehicle that holds the senior debt of recreational marijuana producer, Zenabis.
Perhaps the most fascinating of the announcements related to the development of a joint venture called SunStream. It is essentially a joint venture with Canadian investment firm SAF Group to identify and invest in marijuana-related opportunities.
There are several risks with the arrangement, though, which need to be considered. First, SAF is a small investment firm that purely has experience in the mining and energy sector. Moreover, it is known that Sundial’s CEO was a major factor behind the deal due to his personal relationship with SAF.
Additionally, SAF’s track record is relatively unknown and for Sundial to commit $188 million without concrete evidence is questionable.
Final Word On SNDL Stock
SNDL stock has been gaining thanks to retail traders. However, the stock lacks real substance, with a questionable outlook and weak fundamentals.
Sundial is scaling down its cannabis operations and focusing on strategically expanding its portfolio of investments. The results of these investments remain to be seen but have several risks attached to them.
SNDL stock is nothing more than a speculative cannabis bet at this point.
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On the date of publication, Muslim 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.
