In pre-market trading on Friday, cannabis grower Sundial Growers (NASDAQ:SNDL) saw a 33% gain in its share price. Investors who witnessed the move in SNDL stock could have concluded the company had just delivered explosive third-quarter earnings results.

However, a subsequent cool-off to a 13% gain midway through Friday’s session says a lot about Sundial Growers’ mixed earnings report. Perhaps it speaks to management’s after-earnings announcement, which brought a psychologically and technically bullish signal for SNDL to a meme stock-loving crowd.

SNDL Investors Love Its Earnings Report

Sundial Growers’ third-quarter revenue of 14.4 million CAD ($11.4 million) showed a welcome growth of 12% year-over-year (YOY). The company also saw a strong 57% sequential increase from its most recent quarter’s sales figure.

Meanwhile, a third-quarter net earnings reading of 11.3 million CAD ($9 million) looks disconnected from the quarterly revenue line. Profits came largely from non-operating gains on derivative liabilities. Actually, positive earnings obscured a deep 18.8 million CAD in operating losses for the quarter.

That said, considering that the company reported a staggering net loss of 71.4 million CAD during the same quarter last year, there’s still some reason for SNDL stock investors to smile.

What’s more, looking at a positive adjusted EBITDA of 10.5 million CAD ($8.6 million) for the quarter just feels better than studying the usual losses on that line. Clearly, Sundial Growers is no longer the same business it was a year ago — let alone a quarter ago.

3 Ugly Numbers Buried in a Great Quarter

Sundial’s latest revenue print was strengthened by the integration of the newly acquired Spiritleaf retail operation. Otherwise, the company’s old and original cannabis cultivation and production business generated 8.2 million CAD in revenue, down 11% sequentially. This marks the first ugly number in Sundial’s latest quarterly results.

Actually, the legacy business is under severe strain. Its revenue was 36.4% weaker on a YOY basis. Investors should continue to watch this segment, which produced the second ugly number to watch in upcoming reports.

Finally, Sundial is still struggling with its marijuana-growing operations. The company shifted from wholesale cannabis production to target the premium, high-potency pot market. But results are slow to show. This leads us to the third ugly number: negative gross margins.

The company’s gross profit before any fair value adjustments remains a loss. Inventory write-downs are a recurring and discouraging feature. They paint a gloomy picture of a struggling cannabis business that is still far from generating profits any time soon.

Watch Sundial’s Investments Portfolio

Interestingly, though, the company’s new investment segment continues to realize tangible gains for SNDL stock investors to cheer about.

The segment suffered unrealized losses on equity investments during the quarter. But the fund managers still booked some millions in gains on marketable securities and recorded millions more in revenue from fees. The company recognized a juicy 10 million CAD profit share from companies it holds minority interests in.

Investments comprise Sundial’s largest segment now. Unlike its peer Aurora Cannabis (NASDAQ:ACB), which wound up its long-term investments program, SNDL could be an interesting pot fund manager to watch going forward.

Investments have generated positive earnings before taxes for the company over the past three quarters. It’s the only segment to have achieved this feat, to SNDL stock investors’ delight.

However, unrealized losses could still find their way into the realized losses line if they persist long enough. Investors should monitor the quality of assets in this key growth segment.

SNDL Stock Expects Positive Cash Flow By 2022

A strong cash position and debt-free balance sheet is one positive result from Sundial’s extremely dilutive equity raises over the past 12 months.

This boosts the confidence of SNDL stock’s base, largely comprised of retail investors. The company is showing it can see through its chosen investments’ anchored and retail-heavy growth strategy without funding distractions.

Sundial had 1.1 billion CAD ($956 million) in cash and cash equivalents as of its fiscal third quarter. Management is upbeat that operations could soon turn cash flow positive.

“We expect that the achievement of our objectives will result in an aggregate base business that generates free cash flow in 2022,”CEO Zach George said in Thursday’s earnings release.

Talk of positive free cash flow by next year is good music to SNDL stock investors’ ears.

Mixed Signals From SNDL Stock Buybacks

In early November, Sundial Growers announced plans to repurchase about 100 million CAD ($79.6 million) worth of its common stock. The share buy-back program is set to commence on Nov. 19.

The share repurchase program could reduce the company’s outstanding shares by up to 102.8 million (or 5% of issued and outstanding shares.)

Most noteworthy, the company could spend nearly 18% of its unrestricted cash balance to execute the repurchase program. Perhaps executives are convinced about SNDL stock’s undervalued narrative. It could serve investors well to buy out willing shareholders at current “low” stock price levels.

Share buybacks reduce the total number of outstanding shares. If shares are genuinely undervalued, the cannabis grower could cheaply reduce the number of claims on its future profits.

Ironically, though, the company will use funds from earlier equity raises at bloated valuations to buy back its shares.

Probably, the hottest question on investors’ minds today is whether Sundial Growers really believes its stock is undervalued. What if management feels there is excess cash to the company’s requirements right now?

It’s possible that the company (which is deploying a new investment fund) is running out of new investment opportunities. Fund managers rarely return cash to shareholders, unless they feel they are no longer up to the task of generating superior returns.

That said, the company still has to manage its bloated share count somehow.

On the date of publication, Brian Paradza 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.

Brian Paradza is an investing enthusiast who was awarded the CFA Charter in 2019. A strong believer in fundamentals-based long-term investing, Brian learns from gurus like Warren Buffett but acknowledges human behavioral tendencies that drive short-term “madness”. You may find him inquisitive as he examines tech investing opportunities, cannabis, blockchains, and the new cryptocurrencies asset class.