Sundial Growers (NASDAQ:SNDL) stock is trading far from its meme status peak set in February.

SNDL stock closed at $2.95 on Feb. 10. Short-sellers have a heavy bet against the cannabis firm. Besides poor profitability and valuations, why is Sundial struggling on the stock market?

Sundial’s latest acquisition, in an all-stock deal, will support the bullish argument for the company’s upside ahead.

Last month, Sundial announced an arranged agreement to acquire Alcanna for $346 million. Alcanna is Canada’s largest private liquor retailer. It has 1717 locations, mostly in Alberta. Nova Cannabis is Alcanna’s strategic partner that holds a 63% equity interest.

Sundial’s Chief Executive Officer, Zach George, said that Alcanna has a value-focused model in liquor retailing. Its market stability in the space is an ideal model for Sundial to follow.

The firm will position its retail channels for profitability.

“We intend to position all of our retail exposure for profitability and strive to work with Canadian licensed producers to delight consumers with quality cannabis products,” George said.

 

Investors did not react at all after the deal. They are not happy with the all-stock deal that paid Alcanna investors with a 39% premium.

Still, Sundial’s diversification into the liquor business is a potentially positive development for SNDL shareholders. For example, Sundial could sell its products at all of the Alcanna liquor stores.

A Closer Look as SNDL Stock

At the end of the second quarter, Sundial reported cash, marketable securities, and long-term investments of $1.3 billion. It has no outstanding debt. Losses are a concern.

It lost $52.3 million in the quarter. When the company excludes a non-cash provision of $60.4 million for the impairment on the Olds facility, net income would have been $7.7 million.

Few Wall Street analysts offer a price target on Sundial. One analyst from Canaccord Genuity set an 80 cent price target a month ago (according to Tipranks).

On the chart above, Sundial’s quant scores are cautious. The stock offers modest quality and growth but has poor valuations. Sundial has a value score of 8/100. The quality, which depends on metrics like return on invested capital, will eventually rise.

So long as the acquisitions add meaningfully to revenue, Sundial’s growth and quality scores will improve from here.

After earning $7.7 million (adjusted), the adjusted EBITDA loss is still $0.2 million in Q2/2021. Until Sundial posts sustained profits on a GAAP basis, markets are in a wait-and-see pattern.

SunStream is a billion-dollar opportunity. CEO George said in the conference call that it sees “a target pipeline well north of CAD1 billion in front of us.”

To get there, it needs to expand its opportunities when they become available. Shareholders may interpret the CEO will make aggressive use of cash through acquisitions and investments in the business.

Sundial is conservative in its outlook for branded sales. The industry still lacks visibility. Fortunately, the company has good traction in some of its products.

For example, LA Kush Cake is a Top Leap brand. Romulan and Platinum Cookies are under its Palmetto brands. Those products have had strong momentum since their launch.

Sundial will need to sustain the positive momentum by investing in product development. As it works on commercial flowering, it may bring the products to market in early 2022. From there, it may scale and accelerate sales.

Risks and Catalysts

Sundial invested in new manufacturing equipment. This will introduce automation and efficiency. The firm will need strong demand and falling cost of goods sold to achieve profitability. Competition in the cannabis market may intensify, hurting demand.

Sundial’s aggressive acquisitions have operational risks. It may face operational issues that delay investment returns. In addition, if accountants recognize it overpaid for a company, Sundial would have to write it off as a goodwill write-down.

The Federal legalization of cannabis in the U.S. is a major catalyst for the industry. Although multi-state operators will rise the most, SNDL stock will get a lift. Its billion-dollar revenue goal depends largely on Canada. Still, its peers will focus predominantly on the U.S. and Europe.

As competitors grow their business in the U.S. following legalization, Sundial will face less pressure in its domestic market.

Your Takeaway

Speculators largely gave up on Sundial. The stock is unlikely to skyrocket like it did earlier this year. Unless this penny stock catches Reddit’s attention, investors must rely on the company’s fundamentals.

Look for Sundial to post shrinking losses. It must raise its outlook for 2022 and explain how the acquisitions will add meaningfully to the business. When it does that, investors will have more confidence in the stock.

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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.

Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.