Sundial Growers $Sundial Growers Inc.(SNDL)$ is the kind of cannabis stock that even veteran cannabis investors might have never heard of. Yet after its wild run this year, it has become the kind of stock that even non-cannabis investors know of. SNDL is a penny stock which took advantage of its wild price movements to bolster its balance sheet and change the narrative from struggling cannabis operator to a cannabis investment arm flush with cash. Thanks to the cash infusion, SNDL suddenly trades at a market cap that is being bolstered by the size of its balance sheet. SNDL remains a “show me” story as it needs to execute on both its cannabis and investment operations.
Sundial Stock Price
Why are we looking at a penny stock? SNDL is trading at only a fraction of all-time highs, and that’s only in the past 2 years.SNDL came to prominence earlier this year, likely because it was one of the cheaper penny stocks in the cannabis sector. Amidst the meme-craze, SNDL saw its stock explode 10x higher in a matter of months.
SNDL took advantage of the run-up to raise an incredible amount of cash.In 2021 alone,SNDL has raised over $1.1 billion CAD through equity raises and exercising of warrants,with average share prices around 30% higher than current prices.With approximately 2.1 billion shares outstandng,SNDL is now trading at a market cap around $1.39 billion USD,which shows just how transformational the capital raise has been.
What is Sundial?
SNDL is both a cannabis operator in Canada as well as having an investment operation.
Margins are a sour spot, as gross margins were negative 4% on an adjusted basis. This appears heavily impacted by the rapidly declining prices. Whereas branded prices were $3.19 per gram, overall prices were just $1.69 per gram - down from $3.37 the prior year. SNDL has closed on its acquisition of Spiritleaf, which boasts the largest cannabis franchise retail network in Canada.
Adjusted EBITDA margins are significantly better at Spiritleaf than SNDL, so shareholders may hope for some margin improvement moving forward.
The more important story is that of the investment operations. SNDL has over $350 million in investments with $885 million in cash available to be deployed.
As stated earlier, SNDL’s market cap is around $1.8 billion CAD, so this $1.2 billion or so of investments and cash forms the bulk of any thesis on the stock.
To further accelerate its investment operations, SNDL has formed a joint venture with SunStream Bancorp, who has more experience as an investment operator.
SNDL has already deployed $188 million into the joint venture and has made commitments to increase that to $538 million. It is thus far too early to determine if these investments will prove profitable, but SNDL has recognized $25 million in investment income thus far in 2021, so there are some early signs of success.
Is SNDL Stock A Buy, Sell, or Hold?
There’s two ways I look at SNDL as an investment thesis.
First, we could net out the cash and investments from the market cap to determine what price we are paying for the Canadian cannabis assets. Net of cash and investments, SNDL trades at around a $600 million market cap. If we include Spiritleaf operations, then SNDL earns roughly $72 million in annualized revenues, meaning it is trading at roughly 8.3x sales from its cannabis operators trade at similar or lower multiples-and they boast far stronger growth rates and profit margins.
Instead, SNDL seems like the kind of stock that you can only buy when the stock price falls much lower. In my view, one could only somewhat justify buying cannabis penny stocks if there is some sort of fundamental justification - the typical idea is that the stock looks deeply undervalued but the penny stock status elevates the risk. US operator MariMed $MariMed Inc.(MRMD)$ , trading at 3x revenues, comes to mind. Yet SNDL doesn’t have the same undervaluation and it is very difficult to form any kind of conviction in either its cannabis or investment operations. I would be more interested if SNDL was trading around $1.0 billion CAD valuation or lower, because in that case I could say that the stock is trading less than the value of its investments, while offering the cannabis operations for free. SNDL would need to trade at $0.38 per share in that case. But it seems unlikely for such a price to be reached in the absence of a broader market selloff, which would imply better buying opportunities elsewhere.
It seems that SNDL is best left for those interested in meme-stock investing.
Souce:seekingalpha
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