At the end of 2020, Sundial Growers (NASDAQ:SNDL) stock was trading at 47 cents. In the midst of a meme-stock rally, SNDL stock skyrocketed to its 52-week high of $3.96 in February 2021.
The stock subsequently plunged, and the decline can be attributed to two factors. First and foremost, speculative investors booked profits in the stock which had provided multi-fold gains in the previous few months. Furthermore, the company used the rally to sell a significant amount of its stock.
Sundial is a hot, speculative penny stock. However, the company’s fundamentals have improved meaningfully and at its current levels, the stock looks inexpensive. Consequently, I would not be surprised if SNDL stock doubles in the next few quarters.
Here are the company’s potential positive drivers.
Sundial’s Investments Will Deliver Strong Returns
Sundial’s business can broadly be divided into two segments. First, the company has its own brand of cannabis products. Secondly, it is investing in the debt, equity and hybrid instruments of other cannabis companies.
Sundial has already invested $350 million in other firms. For the first half of 2021, the company reported income of $25.2 million from these investments.
It’s worth noting that the cannabis industry has long-term, positive catalysts. Sundial expects the legal cannabis industry to be worth $47 billion by 2025. As companies in the industry grow, the company’s investments are likely to deliver good returns.
Also importantly, Sundial has a joint venture with SAF Group. The JV has been established to invest in the global cannabis industry. In July 2021, Sundial announced that it had increased its commitment to the JV to $538 million.
By providing a source of steady cash flows, the JV could be a game-changer for Sundial
Meanwhile, Sundial reported cash and equivalents of $885 million as of the end of Q2, giving it the ability to grow organically and through new acquisitions.
Sundial’s Brands Will Grow
Sundial has its own portfolio of brands. The company is focused on inhalable products, including dried flower, vapes and pre-rolled offerings.
For Q2, the company reported net cannabis revenue of $9.2 million and an EBITDA loss, excluding some items, of $200,000. I believe that the company’s revenue growth is likely to accelerate in the coming quarters.
A key reason for my view is Sundial’s acquisition of Spiritleaf Retail. Spiritleaf has the largest cannabis franchise retail network in Canada. For Q1, Spiritleaf reported sales of $8.8 million and an EBITDA margin, excluding some items, of 6%.
As a result of the acquisition, Sundial will have access to 100-plus stores across six provinces. The deal will help the company significantly expand its brand visibility. Since the acquisition was completed in July, the positive impact on SNDL stock is likely to be seen in 2022.
The Bottom Line on SNDL Stock
SNDL stock has remained depressed despite its positive news. I believe that Sundial can significantly boost the shares by making a few quality acquisitions or by buying stakes in a number of top companies.
Further, Sundial has been building a strong presence in Canada. It seems entirely likely that the company will expand to other nations. In particular, if cannabis is legalized at the federal level in the U.S., Sundial is likely to enter that country.
Sundial has said that it has enough cash to “maintain capacity and fund future development activities for at least the next 12 months.” Therefore, it may sell more stock to prolong that period.
But the shares have been depressed for some time, and a sharp reversal seems to be on the cards.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.
