Sundial Has the Potential to Double From Current Levels

SNDL stock - Sundial Has the Potential to Double From Current Levels

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I would be extra careful when considering exposure to meme stocks or speculative names in the current macroeconomic environment. However, Sundial (NASDAQ:SNDL) seems to be an exception. With negative industry sentiments and equity dilution, SNDL stock has corrected by 35% in the last six months. I would not be surprised if it doubles from current levels in the next year.

For 2021, Sundial reported revenue of 56.1 million Canadian dollars (CAD). On a year-over-year (YOY) basis, that number declined by 8%. While the headline number looks discouraging, there are several positives to note.

Sundial reported revenue of 22.7 million CAD for the fourth-quarter of 2021. On a YOY basis, that figure surged by 63%. If this momentum can sustain in 2022, SNDL stock is positioned to trend higher.

In the investment segment, Sundial deployed 577.9 million CAD in cash. The company still has 378 million CAD to be deployed in various debt, equity and hybrid instruments. It’s worth noting it generated 32.9 million CAD in profits from equity accounted investments in 2021.

However, this was more than offset by 44.5 million CAD in unrealized losses on marketable securities. Once sentiments change for the cannabis industry, there is potential for a surge in profits from the investment segment.

I also like the fact that Sundial has a strong balance sheet with no outstanding debt as of December 2021. The company has the financial flexibility to pursue aggressive organic and inorganic growth.

Sundial already commands a market leadership position as a distributor of cannabis in Canada with over 184 stores. The company also happens to be the largest private retailer of liquor in Canada.

In terms of risks, Sundial raised 1.2 billion CAD in capital in 2021. This resulted in a massive equity dilution. The company continues to report operating level losses. There is a possibility of further equity dilution for growth.

However, it seems unlikely that dilution would come at this price. The management would wait for a meaningful rally.

Coming back to the positives, Sundial also has its own brand portfolio with a focus on inhalable products. While its operations are focused on Canada, there is financial flexibility to make inroads into new markets.

This is worth mentioning as more states in the U.S. legalize recreational cannabis. Additionally, Sunstream, a joint venture between Sundial and the SAF Group, is already a leading lender to the U.S. cannabis industry. This provides Sundial with indirect exposure to the high-growth market.

Overall, the company is creating a diversified business that includes cannabis operations, cannabis retail, liquor retail and investments. Once industry growth picks up, the investments segment is likely to deliver healthy profits.

At the same time, the company can leverage its extensive distribution network to boost its branded portfolio sales. SNDL stock looks attractive after a deep correction. I expect the stock to trade above $1 once market sentiments reverse.

On the date of publication, Faisal Humayun did not hold (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 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.

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