Estimated read time: 4 minutes
Publication date: 4th Jun 2021 10:59 GMT+1
Shares of Canadian cannabis company Sundial Growers (NASDAQ: SNDL) are trading at $1.275 at the time of writing. Comparatively, SNDL stock closed trading at $0.69 per share on May 13. So why has the stock gained 85% in less than one month?
The recent rally can be attributed to the Redditt group called WallStreetBets where retail traders have initiated a series of short squeezes in 2021. SNDL stock is already up 50% this week and its short interest ratio of 15.44% indicates more pain is ahead for short-sellers.
Sundial shares were trading around $0.70 last month and if the shares touch $1.4, short-sellers who borrowed the stock at a lower price will have to buy it back at double the price. As short-sellers look to exit their position, SNDL stock might end higher in the near term. Other stocks that have gained momentum in recent trading sessions include BlackBerry (NYSE: BB), GameStop (NYSE: GME), and AMC Entertainment (NYSE: AMC).
Sundial was part of a similar price rally in early 2021 where the stock touched a high of $3.96 per share in February. However, long-term investors should note that SNDL stock might decline in market value once the short squeeze is over.
Sundial has focused on strategic investments
Since the start of February 2021, Sundial has announced a series of strategic investments. It invested $22 million in Indiva - a cannabis company that produces edible marijuana products. In addition to purchasing an equity stake in the Indiva, Sundial will also provide the former with a term-loan facility.
Sundial established a joint venture with SunStream Corp which will consider investment opportunities in the high-growth marijuana space in Canada and other global markets. Sundial invested $100 million in the joint venture in March and its total investment is close to $200 million at the end of April.
Sundial also acquired more than a10% stake in Valens after investing $2 million in the company. Valens focuses on cannabis extraction and its sales in the last 12-months are $72 million.
In May 2021, Sundial said it will acquire 100% of Inner Spirit in a deal valued at $131 million. Inner Spirit plans to expand its retail store count at a rapid pace and it generated $27 million in sales during 2020.
We can see that Sundial is diversifying its operations and also investing heavily in acquisitions and cannabis financing. While the company’s gross sales in Q1 fell 29% year over year to $11.7 million these acquisitions and investments should help it expand top-line growth in the upcoming quarters. Sundial attributed its massive revenue decline in Q1 to a shift in product mix as well as a decline in its product portfolio.
Alternatively, its investment in Indiva will allow Sundial to expand its product line while Inner Spirit will allow Sundial access the retail market in Canada.
What next for SNDL stock?
Analysts tracking SNDL stock expect the company to increase sales by 50% year over year to $73 million in 2022 after it declines 3.4% to $49 million in 2021. It suggests that SNDL stock is trading at a forward price to sales multiple of 49x given its market cap of $2.4 billion. We can see that shares are trading at sky-high multiples and are poised for a correction once the short squeeze is over.
One thing that will work in favor of Sundial is the company’s cash balance of $752 million and a debt-free balance sheet. It means Sundial can continue to acquire companies that will be accretive in the long run while providing it with enough leeway to improve profit margins, given its quarterly cash burn of $34.4 million.
However, Sundial stock remains a high-risk high-reward stock as it reported losses of $330 million in the last four quarters. Investors will hope that the company’s huge cash pile will be used judiciously to target profitable cannabis companies for quality acquisitions.
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.
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