Uncertainties in the federal legalization of cannabis are taking a toll on Sundial Growers (NASDAQ:SNDL) stock.
Sundial spent most of the time below the $1 level for months. Its brief rally in June is an exception. At the time, Reddit’s r/WallStreetBets tried, but failed, to take the Canadian cannabis grower’s stock higher.
Where will Sundial shares go from here?
Legalization Delays Hurt SNDL Stock
Senate Majority Leader Chuck Schumer released draft legislation on July 14 that would legalize weed. This marks the rough start on the debate for taking away federal penalties on cannabis. Eighteen states already fully legalized marijuana and 37 permit medical marijuana.
Moving its legalization forward at the federal level benefits everyone. For example, it would free up police, court and prison resources. The judicial system would no longer need to process marijuana cases.
The government debates ahead increase the likelihood of further delays. Sundial Growers risks trading lower in the weeks ahead as bears bet against it. The short interest on the stock is 14.25%, according to data compiled by Finviz.
In its May presentation, Sundial highlighted its first quarter of positive adjusted EBITDA in its history, at $3.3 million. The Canadian firm posted $746 million in cash and no debt. The strong balance sheet will alleviate investor concerns of stock dilution.
Conversely, Aurora Cannabis (NASDAQ:ACB) and Canopy Growth (NASDAQ:CGC) keep losing money the bigger it gets. This is a classic red flag of a broken business.
The Opportunity
Sundial has a massive 448,000-square-foot indoor facility. It uses a “small-batch-at-a-scale” module growing method to maximize operating profits. Furthermore, it packages its goods at the lowest possible costs.
By managing output using a data-driven consumer-centric approach, it avoids unnecessary waste. No other competitor runs the business at this detailed level.
Sundial’s unmatched moat suggests that the stock could build an uptrend from here. When the company reports quarterly results in August, it could squeeze short sellers for the third time. Previously, SNDL stock rallied in June to around $1.50. In Feb, the stock spiked to $3.96, albeit for only a day.
Sundial has five major high-value brands to micro-target customers. Topleaf is a legacy premium brand that appeals to the company’s loyal customers. BC Weed is grown in British Columbia. It cultivates the product in small batches, coming in flower, vape, and concentrates format. Sundial’s flagship branding comes in premium packaging. This will differentiate its product from the competition. At prices comparable to others, the company’s profit will grow as consumer demand accelerates.
The Risks
Sundial has unfavorable stock scores that investors should not ignore. The company does not have a long enough history of strong results. This is normal for a growing firm.
As shown, Sundial scores poorly on quality, growth, and value. Until it posts a few quarters of positive, adjusted EBITDA, the stock will offer investors low value and quality.
Investors should treat SNDL shares as speculation in the near term. Until it increases production, Sundial will post small profits. The company cannot increase production unless demand increases. It risks losses if output increases more than consumer demand levels.
On Wall Street, two analysts offer no higher than a “hold” rating. The average price target is 75 cents, according to Tipranks. Cautious investors could wait for the stock to fall further, ahead of its earnings report.
Your Takeaway
Sundial is depending on demand increasing in Canada for its growth. It needs full U.S. legalization to expand its addressable market. It had just nine employees in the U.S. and generated a negligible $2.95 million in sales. To prepare for growth ahead, the company raised $100 million in February.
The stock and warrant sale benefited from the market’s peak in the sector. This also left many investors holding SNDL stock at the worst price. Should shares rally again, it may face selling pressure as shareholders sell the stock to break even again.
Cannabis investors should consider Sundial as one of many stocks to hold. Among the basket of companies in the sector, the company has high cash levels on hand and no debt. That would lower the long-term risks.
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On the date of publication, Chris Lau 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.
