It’s very difficult to ascribe a bullish narrative to Sundial Growers (NASDAQ:SNDL) at this time. While looking through SNDL stock and its latest financial results, I couldn’t find any evidence leading to a logical conclusion other than to avoid it.
The two most convincing arguments would be its expanding retail network and that the stock itself does have the potential to rise exponentially. So, let’s start with those two factors and understand why they don’t amount to enough for a logical investment in SNDL stock.
Inner Spirit Acquisition For SNDL Stock
Sundial Growers completed its acquisition of Inner Spirit back in July. Inner Spirit is Canada’s largest cannabis retail store network.
And, as Sundial Growers’ Q2 earnings report notes:
“In less than three years, Spiritleaf has sourced, built and opened more than 100 franchised and corporate-owned stores across Canada in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, and Newfoundland and Labrador. Spiritleaf served 2.3 million guests in 2020 and currently has more than 320,000 members in its Collective customer benefits program.”
The network boasted $124 million CAD in trailing twelve month sales through March 31, 2021. Further, its 100 plus retail locations count over 320,000 benefits program members. Indeed, Inner Spirit looks like it has certain strengths. However, Inner Spirit still posted a total net loss of $3.1 million CAD throughout 2020.
The point here is that although the Inner Spirit acquisition broadens Sundial Growers’ operational abilities and scale, it compounds a problem: That problem is losses. Even if investors look at the acquisition with a positive mindset, there are red flags which abound.
The Inner Spirit acquisition was one potential catalyst to drive SNDL stock higher. But, as I mentioned, I don’t think there’s much logic behind the idea. The other catalyst is that of short interest.
Squeeze Play
Sundial Growers is heavily shorted. More than 26% of its float is currently shorted. The narrative there is not one which investors can predict with any degree of certainty: Perhaps retail investors can trigger a squeeze and raise prices quickly. Perhaps they can’t. It’s a bet, and little more.
With share prices at 70 cents, that will certainly interest some, but again, logical investors want sound reasoning behind their investments. That’s why SNDL stock is to be avoided even in the best case scenario: The Inner Spirit Acquisition isn’t immediately additive and a short squeeze is nothing more than a bet.
Beyond that, Sundial Growers continues to have real problems.
Revenues Are Concerning
In a nutshell, all of the company’s revenue formats are declining. Q2 revenues declined by 47.66% on a year-over-year basis. Through the first half of 2021 that figure was a similarly concerning 40.17% decline.
By every revenue format – dried flower, vapes, oil, edibles and concentrates – Sundial Growers is slipping. It’s really difficult to see where an investor can find optimism given that fact.
The simple truth is that sales drive companies. In some cases companies rebalance their sales to focus on emerging opportunities with greater potential. If that were the case, perhaps an argument could be made that Sundial Growers is undertaking such a transition.
But the revenue numbers don’t suggest that at all. There is no area within its sales figures that indicates an emerging opportunity that can right its ship. That has to cause investors to consider what an investment in Sundial Growers really means.
None of this even takes the company’s mounting losses into consideration.
Losses Rising
Sundial reported a $70.776 million CAD operational loss through the first half of 2020. That number has ballooned to $186.732 million CAD in the same period in 2021. If that holds, the company will hit a $370 million CAD loss on an annualized basis this year.
It’s hard to see why any investors should be interested in Sundial Growers at this point.
On the date of publication, Alex Sirois 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.
