Is Sundial Growers Stock A Buy?

Sundial Growers Inc (NASDAQ:SNDL) took center stage on Reddit’s WallStreetBets community for a brief period in February. This pushed its share prices up to a high of $3.96, a level it hasn’t reached for some time. The spark behind the rally was due to cannabis sales continuing to surge through the widespread shutdowns.

For investors the pullback after all-time highs has led to the question: is Sundial Growers stock a Buy?

Cannabis is still associated with a stigma across much of the United States, leaving many multi-state operators (MSOs) empty handed against deeper-pocketed Canadian companies. Even those are in penny stock territory because of the nature of the industry as a whole.

While it may seem exciting to invest in cannabis, the industry has a wide variety of company “types.” Some are agricultural; others are medical, and still more are technology-based. Understanding these distinctions is important when investing in the cannabis industry, as they face different challenges when the industry grows.

Here’s the skinny on cannabis investing.

Sundial Holds 3% Of Canada’s Cannabis Market

Sundial Growers is a Calgary, Canada-based cannabis company. The company eschews the high-margin retail market to sell wholesale to dispensaries. It was a relatively unknown force in a crowded space until the company (and industry) caught the eyes of traders seeking heavily shorted positions as a % of float.

Sundial holds about 3.3 percent of Canada’s recreational cannabis market, and it did push more product when consumers were stuck at home.

For the uninitiated, Canada legalized recreational use of cannabis starting October 2018. That sparked a green rush of cannabis companies getting listed on the Toronto Stock Exchange. Unfortunately, many of those companies failed to live up to expectations as an oversupply of product drove retail prices down.

Now that the Reddit fever is over, investors are wondering whether it’s a good time to get into Sundial Growers.

Is Sundial Growers Stock A Buy?

Sundial Growers has a market capitalization just over $1.5 billion in March 2021. Share prices plummeted to a 52-week low of $0.14 per share during the March ’20 crash before rebounding back to over $0.50 per share by year end.

By February 2021, the Reddit community was credited with driving the highly shorted stock price up to $3.96 before it came crashing down.

One issue that poses a threat is that cannabis is a seasonal investment that does better around harvest season.

The other is that it could find itself eventually delisted from NASDAQ due to poor financial and investment performance. Its price continues to dip below $1.00, and Reddit traders only threw it a temporary lifeline.

Third quarter 2020 revenues of $9.7 million are a 62 percent dive from the previous year’s $25.4 million. But it did improve its net loss to $54 million, compared to $74 million, and that helps its (dismal) bottom line.

At last count, the company had about $19.7 million in cash with $16.6 free cash flow. Even at $1.00 per share, Sundial is arguably a very risky bet.

Sundial Growers Lacks Market Dominance

The biggest problem with Sundial Growers is it hasn’t been a dominant player in the Canadian cannabis industry. And Canada’s market pales in comparison to the size of the U.S. cannabis market size. This limits its growth in a highly competitive industry.

It’s already running out of cash and doesn’t have a very long runway. It’s entirely dependent on the supply and demand of a commodity, making it a very volatile stock.

And that was before the army of Reddit traders descended upon it to give retail investors perhaps the wrong impression about its future prospects. Instead of investing long-term, many investors only see the short-term gains and believe they will last forever.

No winning streak is ever permanent, and a lot of investors lost money in Sundial, both recently and during its IPO. And that’s in large part because Sundial has lots of stiff competition.

American Competitors May Be A Better Bet

Without beating around the bush, Sundial Growers isn’t the best positioned company in the industry. Experts like Jason Spatafora, known as the Wolf of Weed Street, recommend investing in multi-state operators trading on the OTC markets.

Big successful companies like Curaleaf (CURLF) and Cresco Labs (CRLBF) are operating in the United States and generating much larger revenues than many of their publicly traded Canadian rivals.

Sundial has proven that even a NASDAQ company can perform much like a penny stock. The only real difference between an OTC and publicly listed cannabis stock is its geographic location.

And the United States is the largest and most important cannabis market in the world. The companies with established footholds in this country have the best chance at future success. Sundial does not check those boxes.

Is Sundial Growers Stock A Buy? The Bottom Line

Sundial Growers had its time in the spotlight. This is because it was so heavily shorted by institutional investors that it drew the attention of the WSB community. But Sundial isn’t the best play in cannabis. It’s a Canadian company operating with a small share of a smaller market than the U.S..

Investors seeking investments in the cannabis industry should instead look into the American multi-state operators (MSOs). These are the companies dominating the larger American medical and recreational markets.

Also consider cannabis ETFs and other investments in high-performing companies. The biggest problem with Sundial is it’s burning cash at a high rate and has shallow pockets to keep the business going. Sometimes there’s a very good reason why hedge funds are shorting a stock.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.