In my mind, Sundial Growers (NASDAQ:SNDL) stock still makes little sense.
What I see when I look at Sundial is a cannabis/consumer packaged goods (CPG) company following in the footsteps of larger, comparable firms in the space. However, I think other firms are more likely to succeed. I believe that their investment is more attractive and capital will flow toward them before Sundial Growers.
Further, I also believe recent results simply indicate that Sundial Growers will continue to struggle in carrying inverter favor even when things are good.
Skeptical Market
On the face of it, Sundial Growers’ most recent earnings should have served to bolster its stock. There were a number of positive metrics investors could have referred to in making that determination.
The firm reported Q3 revenues of CAD $14.4 million. That was a 57% increase over the previous quarter and a 12% increase on a year-over-year basis. Further, Sundial Growers’ $71.4 million Q3 2020 net loss became $11.3 in million net earnings.
The point I want to make here is that it really didn’t make much of a difference for SNDL stock prices. They shot up by about 50% immediately on the news, but quickly faltered. My suspicion is that investors realized, as my colleague Faizan Farooque reported, that “a good portion of the net income was attributable to its income tax recovery and fair value changes in derivatives.”
So, it could have been that investors simply realized those were not the type of increases they liked. It took little more than a week for SNDL stock to return its gains following the earnings report.
I alluded to the idea that Sundial Growers is a “me too” kind of investment in the space at the beginning of this article. I specifically was referring to it following the same path as Tilray (NASDAQ:TLRY).
Acquisitions Strategy
At this point investors can see there’s a bit of land grab going on in the cannabis/CPG space. The biggest news happened when Tilray acquired Aphria back in May. The overarching strategy is to grab as big a share of the pie as possible. It’s revenues that matter now.
Sundial Growers is following suit. It was in October that Sundial Growers announced it had entered into an agreement to purchase Alcanna. Alcanna is Canada’s largest private liquor retailer, and also owns a 63% equity interest in pot retailer Nova Cannabis.
The strategy is similar to that of Tilray, i.e., gobbling up operators and supply chain assets. So, to me, it’s a question of investing in the big dog or the contender at this point.
Both firms will broadly be taking the same approach. It’s just that Tilray is roughly 3x as valuable as Sundial Growers based on market capitalization. At this point it makes sense to consider the bigger players which can grab the most land quickest. That’s my thought, anyway.
If I were to invest in pot stocks now, I’d choose Tilray just for the fact that it looks best poised to capitalize moving forward.
What to Do With SNDL Stock
What’s also worth noting is that the cannabis stock sector hasn’t exactly taken off. That’s a few years after all the uproar sent valuations to unreasonable heights.
I said I’d go for Tilray over Sundial Growers because of its size. However, I can see that the potential for SNDL stock to move upward is obvious. It’s inexpensive and it is building a distribution network and branded assets. That said, pot stocks have long been full of promise but short on results.
If you choose either, it is a question of personal taste. But given that Sundial Growers hasn’t shown investors much this year, I’d tread carefully.
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On the date of publication, Alex Sirois 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.
