Sundial Growers (NASDAQ:SNDL) became a popular meme stock last year. The Canadian cannabis penny stock took advantage of its status to fortify its balance sheet with a massive cash infusion. However, with meme stocks declining in popularity, it is down to brass tacks with SNDL stock.
Sundial’s business has a new look with its foray into the retail cannabis market. Moreover, with a couple of key acquisitions, there is reason to believe that a turnaround could happen with its business. The results of these changes are likely to dictate the direction of SNDL stock.
However, Sundial’s colossal cash burn and rampant dilution of stockholders remains a major issue. More importantly, though, its business is neither growing nor profitable. You are much better off investing in a U.S. multi-state operator, which offers a significantly better risk/returns at this time.
Strategic Shift
Sundial’s core business hasn’t been firing for a while now. Last year wasn’t any different, as its year-over-year revenue growth is at a negative 23.5%. Moreover, its core cannabis segment has yet to report any profits. Hence, it became imperative for it to diversify its operations. The Canadian cannabis sector has been plagued by oversaturation, which has resulted in severe price compression. Therefore, diversification could prove to be a masterstroke down the line.
Sundial has acquired two companies that could potentially reverse its fortunes. The first is Inner Spirit, the largest cannabis retailer in the Canadian market with over 100 stores. Moreover, Sundial also acquired Alcanna, the largest liquor retailer in the country. These acquisitions are likely to add a new dimension to Sundial’s lackluster business.
Furthermore, Sundial has also started offering loans to some of its peers through its venture with an investment firm, Sunstream Bankcorp. Companies engaged in the marijuana business usually have a tough time with traditional banks in securing loans, which makes this a fascinating proposition.
Nevertheless, Sundial’s loan business carries a significant amount of risk as a lot depends on the ability of its debtors. Two companies it has loaned out to have never reported earnings before interest, taxes, depreciation, and amortization (EBITDA) profitability and have been struggling to grow their businesses.
On top of that, to expect a major pullback in revenues from its recent acquisitions is also futile. Both Alcanna and Inner Spirit have reported EBITDA margins of under 8% in the past year. Hence, the future synergy of the combined company is highly uncertain.
Why Invest in SNDL Stock?
Sundial Growers has its fair share of bulls and bears. Though the business has struggled over the past few years, it could change things with its recent developments. Moreover, it also posted a profit in its most recent quarter. Though all of that seems encouraging, it is still not enough to justify why you would want to bet on SNDL stock. Perhaps more so, with so many other options which offer much greater risk/reward.
You can find several U.S.-based cannabis companies with much stronger financials and growth prospects than Sundial Growers. A lot of it is because Sundial cannot compete in the highly lucrative U.S. cannabis market until marijuana is legalized at the federal level. It is unclear when these laws would change, but until then, it is a bit too risky to be investing in SNDL stock.
Bottom Line on SNDL Stock
Sundial Growers has had a rough couple of years and it is now looking at new growth opportunities to sustain its business. The result of its efforts remains to be seen, but they are unlikely to have a meaningful impact on its top and bottom line. Hence, risk-averse investors would be better off scooping stocks of a profitable U.S. multi-state operator instead of SNDL stock.
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On the date of publication, Muslim Farooque 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
Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.
