For investors who purchased Sundial Growers (NASDAQ:SNDL) stock in October 2020, returns have already been multi-fold. SNDL stock touched a low of 14 cents in the fourth quarter of 2020 and currently trades at $1.13.
However, the big rally does not imply that Sundial stock is overvalued. With industry tailwinds coupled with positive business developments, I expect the stock to double from current levels.
As I talk about Sundial Growers, which is a cannabis play, I am reminded of Nio (NYSE:NIO). Last year, Nio stock was trading at depressed levels and touched a low of $2.37 in March 2020. The stock currently trades at $58, which implies 24x return from the lows. SNDL stock surging by 8.5x in the recent past does not imply overvaluation. The rally from significantly undervalued levels is likely to sustain.
Let’s talk about the factors that are likely to keep the momentum bullish for the stock.
Bull Case For SNDL Stock
In the recent past, Sundial Growers has been on a fundraising spree. The company recently announced the closing of a $100 million registered offering. This was followed by an additional fund raising of $74.5 million. With the closing of these two offerings, Sundial has $615 million in unrestricted cash. This provides the company with ample cash buffer to pursue growth opportunities in the coming quarters.
Let me also briefly talk about the cannabis product offerings and the growth triggers. Sundial is focused on premium cannabis products that include flower, pre-roll, vape and oil. In the fourth quarter, the company collaborated with Choklat for the launch of cannabis-infused chocolate bars, drinking chocolate and infused sugar.
The key point from the portfolio perspective is a focus on premium and branded products. For Q3 2020, branded net cannabis sales for the company were 77% of total sales. It’s very likely that the sale of premium products will continue to increase. In the next few years, I expect a robust EBITDA margin.
Sundial is also planning entry into medicinal cannabis. The company has 50% equity interest in Pathway Rx. A licensing agreement latter will enable Sundial to use certain cannabis strains for commercial production. The recent cash infusion is likely to accelerate the company’s plans for the medicinal cannabis market.
Coming back to recreational cannabis, Sundial reported the acquisition of 62 new genetics in Q3 2020. The company believes that some of the genetics are unique. This will help in the development of new inhalable cannabis products.
Overall, Sundial is well positioned to increase its premium product offering in the coming quarters. Entry into medicinal cannabis is likely to be another growth trigger.
Concluding Views on Sundial
In the third quarter, Sundial reported sales and marketing expenses that was higher by 120% on a year-on-year basis. With ample cash buffer, the company will continue to ramp-up brand investment. Further, the company increased commercial coverage across Alberta, Ontario, Manitoba and Saskatchewan.
I would like to point out another factor from the company’s latest quarterly results. The management discussion states:
Sundial’s board of directors has authorized management and its external advisors to consider a broader range of strategic alternatives, including a potential sale of the Company, merger or other business combination, investments in other Canadian cannabis companies.
I would not be surprised if Sundial is a potential merger and acquisition candidate in the coming quarters. It’s expected that “shifting political preferences toward legalization in the U.S. and globally will kick off a flurry of consolidation in the cannabis industry.”
Therefore, SNDL stock has multiple triggers that can spark another strong rally. Even if we eliminate the merger possibility, the stock is worth considering with recent growth initiatives.
In the long term, Sundial Growers will look for expansion beyond Canada. For now, as brand visibility increases, top-line growth is likely to be robust.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.
