Shares of Canadian cannabis company Sundial Growers (NASDAQ: SNDL) went public back in August 2019. However, in the last two years, it has grossly underperformed the broader markets and is down 91% from its IPO price. Despite this massive pullback, SNDL stock remains a high risk bet due to a variety of reasons.
SNDL stock is still overvalued
Sundial is part of an expanding addressable market but the company has failed to deliver on its lofty promises. Sundial’s sales have in fact fallen from $75.86 million in 2019 to $60.9 million in 2020. Now, analysts expect sales to fall by another 7.3% to $46.82 million in 2021. Given, a market cap of $1.5 billion, SNDL stock is valued at a forward price to 2021 multiple of more than 32x which is extremely steep for a loss-making company grappling with sales decline.
Sundial’s sales in the third quarter of 2021 stood at $14.36 million which was higher than its year-ago revenue of $12.86 million. However, it’s investment revenue stood at a negative $4.8 million.
Earlier this year, Sundial disclosed it would focus on the sale of high-margin products to improve the bottom-line. The company also entered the cannabis financing business where it provides debt or equity capital to other licensed producers, thereby diversifying the revenue base.
However, a negative revenue figure for Sundial indicates the company has booked unrealized losses on a few investments. It also meant Sundial ended Q3 with an operating loss of $18.8 million.
Sundial’s massive losses have meant that the company has diluted shareholder wealth at an accelerated pace in the last two years. Between June 2020 and June 2021, the company’s total number of outstanding shares rose from 105 million to more than two billion.
However, investors might point out that the company has a debt free balance sheet and ended Q3 with $750 million in cash providing it with enough financial flexibility in the future.
The bull case for Sundial stock
In the third quarter of 2021, Sundial sales rose by 12% year over year, allowing the company to report an adjusted EBITDA of $10.5 million, compared to a loss of $4.4 million in the year-ago period. These results reflect the company’s business transformation over the last 10 months.
During Sundial’s Q3 earnings call, CEO Zach George explained, “We remain focused on sustainable profitability and continued improvement in all aspects of our operations. Despite the ongoing challenges facing industry participants, our financial condition has never been stronger.”
George added, “Sundial is uniquely positioned relative to its peers as we seek to delight consumers and become a trusted industry partner. Our balance sheet strength enables our team to avoid short term pressures while working to improve the quality of our decision making. We expect that the achievement of our objectives will result in an aggregate base business that generates free cash flow in 2022.”
What next for SNDL stock?
A crowded Canadian cannabis space has meant that several licensed producers are wrestling with negative profit margins to gain market share. But Sundial has restructured its business to focus on sustained profitability.
It is now eyeing the retail market to increase revenue and the acquisition of Spirit Holdings will help it drive top-line higher in the next few quarters. Last month, Sundial also announced the acquisition of Alcanna which is one of Canada’s largest liquor retailers, in an all-stock deal valued at $346 million.
Analysts tracking Sundial expect sales growth to return in 2022 allowing the company to report a positive free cash flow next year. Free cash flow is the money generated by a business after it pays off all expenses, which can be used to fund growth opportunities.
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Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.
