Sundial Growers Is Not Worth the Sum of All Its Parts

Based on 2.06 billion shares outstanding as of Aug. 9 and a SNDL stock price of about 75 cents as of the Sept. 7 close, Sundial Growers (NASDAQ:SNDL) has a market capitalization of $1.54 billion.

Image of marijuana leaves growing on a plant.
Source: Yarygin / Shutterstock.com

That’s right — $1.54 billion with a “B.”    

Right off the top of my head, I can think of two excellent investments this company has made over the past year. However, despite these moves, I don’t think Sundial Growers is worth anywhere near that lofty valuation.

Here’s why.

SNDL Stock and Indiva

Here’s an interesting fact for U.S. readers of InvestorPlace. One of the original “Dragons” on Dragon’s Den — the precursor to Shark Tank — was Brett Wilson, a Canadian energy investor.

Wilson was one of the original Dragons on CBC’s version of the international business show. However, he left the show in 2011 to focus on his other investments, such as Prairie Merchant Corporation

Needless to say, Wilson is a Prairie guy through and through. Unfortunately, he’s also an oil dove, prone to some foolish statements about the oil and gas industry on social media. But that’s okay — he’s still got a lot of interesting investments.

For example, Wilson owned 3.1% of Indiva (OTCMKTS:NDVAF) at the end of May, an Ontario-based cannabis company that’s capturing major market share of edibles in Canada. 

Sundial just so happens to own 25 million shares of Indiva as well, good for 18.4% of the company. Those shares are worth more than $9.3 million at NDVAF stock’s Sept. 7 close price of around 37 cents. Indiva also has six-month sales of 15.3 million CAD ($12.1 million). For our analytical purposes, let’s double that to 30.6 million ($24.2 million) for the entire fiscal year. Then, double it again to $48.4 million for 2022.

Don’t get me wrong. I love Indiva’s marketing. I’ve never tried their edibles, but everyone I know who has can’t say enough good things about the product. But subtract $9 million from $1.54 billion and you still get about $1.53 billion. When it comes to SNDL stock, what are investors paying for?

The Big Retail Purchase

In July, Sundial completed its $106 million acquisition of Inner Spirit Holdings, a Canadian cannabis retailer (Spiritleaf) with more than 100 stores across six Canadian provinces. That’s a little over $1 million per store. Sundial stated the following in its press release:

“We are excited to work with the Spiritleaf team and franchise partners to further develop and optimize the store network in Canada and provide a clear path to sustainable profitability for Sundial.”

In 2020, Spiritleaf had 26.8 million CAD ($21 million) in sales, up 244% from a year earlier. In the bottom line, it also had adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of 3.4 million CAD ($2.66 million), up from a loss of 4.8 million CAD ($3.76 million) a year earlier. 

Let’s assume revenues increase by 244% in 2021. That’s 65.4 million CAD ($51.29 million). Then, let’s increase it by 244% again in 2022. That brings us to about $125 million.   

Now, in the first six months of 2021, Sundial had revenue of 40.5 million ($31.77 million), 47% of which was from its own cannabis operations and 53% from its investments. Let’s double that to 81.0 million CAD ($63.5 million) for all of fiscal 2021. And double it again to $127 million in 2022. 

So, bring that all together and Sundial, in a very optimistic scenario, could generate $252 million in revenue in 2022 ($125 million from Spiritleaf and $127 million from its cannabis operations and investments, excluding Spiritleaf).

That still puts SNDL stock’s current valuation at 6.1 times 2022 estimated revenue.

The Bottom Line on SNDL Stock

A multiple of 6.1 times 2022 estimated revenue wouldn’t be too bad, if the estimate were rooted in reality. It’s not.

I would be shocked if Sundial’s overall revenues in 2022 were more than $160 million. So, that increases the multiple to 9.6 times 2022 sales. 

On social media sites like Reddit, people are calling Sundial the Berkshire Hathaway (NYSE:BRK-A, NYSE:BRK-B) of cannabis. That’s an insult against Warren Buffett on several fronts. 

I think Brett Wilson’s got the right idea in buying a piece of Indiva. I continue to believe that, someday, it will make Sundial wish they had bought more of NDVAF and put less into Spiritleaf and Sunstream Bancorp.    

Breaking down the numbers, the sum of Sundial’s parts doesn’t add up to the current valuation. Avoid SNDL stock.

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On the date of publication, Will Ashworth 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.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.


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