Pot stocks are on the rise, as legalization prospects for cannabis are brighter than they have been after the 2020 election. Calgary-based cannabis producer Sundial Growers (NASDAQ:SNDL) stock is up 260% in the past three months, having tanked for most of 2020.
Revenues have compressed throughout the year due to the Covid 19-induced slowdown and the management’s misapprehensions about the market. However, with the recent changes, SNDL stock aims to make a big splash this year to its strategy.
The company has struggled for the better part of 2020 to preserve its liquidity and expand revenues in a challenging business environment. In cleaning up its balance sheet, the company has undertaken serious dilution with over 800 million shares.
However, the real concern is its sales, which were poor throughout 2020. Sundial Growers is now revisiting its strategy and focusing on its branded products to expand its margins. Time will tell whether the management’s zealousness will pay off or not; therefore, investors should tread carefully.
Strategic Changes and Expansion
Sundial has made some significant changes to its sales strategy to reduce its exposure to wholesale channels. The goal is to have an 80% branded mix in the future to increase margins substantially. Moreover, it is looking to form strategic partnerships in expanding its product offerings.
It recently announced its partnership with Chokolat to launch a cannabis-infused confectionary brand. Chokolat will be producing the product, and Sundial will be using its distribution channels to generate sales. Both companies expect to scale production of the brand this year.
Late last year, it entered into an agreement with Simply Solventless Concentrates to produce cannabis concentrate products. SSC will be receiving royalties on the products’ sale, as Sundial will be using its intellectual properties. Additionally, its dried flower brand Palmetto has done exceedingly well off-late, selling out in the Quebec market within a couple of weeks.
Sundial also announced the completion of its all-cash purchase of a special purpose vehicle, Zenabis Investments. Zenabis currently owns CA$58.9million in principal debt. It will be extending loans at 14% per year, maturing in 2025, with principal payments of $7 million. Moreover, Zenabis will also be paying royalties on the sales it generates from its cannabis line. The agreement will provide the much-needed cash injection that Sundial needs in furthering its initiatives.
The company spent the last year paying off its debt and cleared close to CA$220 million last year. It now has just roughly CA$21.9 million in outstanding debt obligations saving more than CA$3 million in interest payments.
Risks
It is imperative to look at some of the risks that Sundial faces before evaluating its potential as an investment. SNDL stock has gained handsomely in the past few months, but it has dropped over 70% of its value if we consider the past year. It is now penny stock that faces a potential delisting from the U.S. stock exchange. Nasdaq sent a notice to the company, which had an initial deadline of Dec. 28 last year. It was able to secure an extension through to June 2021 in complying with the requirements.
In clearing its debt, SNDL stock has gone through severe dilution, and with the Zenabis purchase, it has limited its ability for capital raises for the foreseeable future. Revenue expansion has been constricted in the past several months, which further complicates things.
Additionally, the company recently filed a 6-K, which showed it had sent a default notice to Zenabis. This is surprising considering how it received a CA$7 million payment from Zenabis on time. Whatever the nature of the disagreement, it should weigh in on the stock.
Bottom Line On SNDL Stock
Sundial is gathering steam and is looking to expand its revenue and customer base this year aggressively. Last year was disastrous for the company, but its management is looking to learn from its mistakes and apply themselves more effectively. However, several risks remain with the company, which it needs to sort out this year.
It would be best to keep SNDL stock on your radar for the next few months and see how effectively it progresses and deals with its problems.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
