Do you see a glass of water as half full or half empty? Your answer could be key to how you view Sundial Growers (NASDAQ:SNDL). If you're a half-full kind of person, you'll probably focus on the fact that the stock has tripled so far in 2021. If you're more of a half-empty type, you'll pay more attention to the fact that Sundial is also more than 50% off its highs set earlier this month.
Whatever your perspective is, though, I'm going to take a shot at convincing you that Sundial Growers isn't a great marijuana stock to buy right now. And there are now 98 million reasons why.
Actually, more than 98 million
To be specific, there are 98,333,334 reasons not to buy Sundial Growers shares. That's the number of warrants that holders will exercise for cash, some at a price of $0.80 per share and others at a price of $1.10 per share. Sundial will then issue the exact same number of new warrants that entitle the holders to buy one share per warrant held at an exercise price of $1.50.
Your first reaction to this is probably, "So what?" After all, it's not a terrible deal for Sundial, even though its shares fell after the company announced the transaction last week. Sundial will generate gross proceeds of $89.1 million from the exercise of the original warrants. The new warrants that it's issuing will be for an exercise price that's higher than the current share price.
Why should these more than 98 million warrants be viewed as reasons not to buy Sundial Growers stock? Because of the underlying challenge for the company that this transaction underscores. This latest warrant deal follows two public offerings of warrants earlier this month. On Feb. 2, Sundial closed a $100 million offering. Two days later, it closed a $74.5 million offering.
These kinds of moves are crucial for Sundial, not just for growth but also to keep the lights on. Sundial posted a net loss of 71.4 million in Canadian dollars ($56.7 million) in the third quarter. The company's cash on hand at the end of the third quarter totaled CA$60 million.
Sure, CA$60 million of Sundial's third-quarter loss was due to asset impairment. But the company's third-quarter adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), which excludes that big charge, was still a negative CA$4.4 million -- worse than the negative adjusted EBITDA of CA$3.9 million in the previous quarter.
What Sundial's latest warrant transaction really highlights, though, is the stark contrast between the stock and other better alternatives. For example, let's look at just one of those better cannabis stocks, Cresco Labs (OTC:CRLBF).
For a brief period earlier this month, Sundial's market cap topped Cresco's market cap. After Sundial's pullback in recent weeks, though, Cresco's valuation stands at more than $1 billion higher than Sundial's. But that premium is more than justified.
Sundial's net revenue plunged 36% sequentially to CA$12.9 million in the third quarter. As already mentioned, the company posted a hefty net loss. Cresco, on the other hand, delivered revenue of $153.3 million in the third quarter, a 63% quarter-over-quarter jump. It generated earnings of $4.9 million, with adjusted EBITDA soaring 182% sequentially to $46.4 million.
An astute observer might point out that Cresco has also conducted a stock offering to raise money recently. The company generated gross proceeds of around $125 million in January through an offering of subordinate voting shares. How is Cresco's capital raise any different from Sundial's recent transactions? The company didn't really need the additional money for its current operations since it's already profitable. Instead, Cresco is earmarking the $125 million in large part for "organic and inorganic growth opportunities."
Easy versus difficult growth
That leads me to yet another issue that Sundial's 98-million-plus warrant deal raises. The company will, like Cresco, put some of the money it raises to use in funding growth opportunities. But Sundial's path to growth seems much more difficult than Cresco's.
Sundial CEO Zach George referred to the "rapidly evolving market conditions and consumer preferences in today's Canadian cannabis market" in his comments in the company's third-quarter update. The reality is that Sundial, along with several other Canadian cannabis producers, has been forced to change its plans because of the shifts in consumer preferences. Competition in Canada is fierce. The companies that react more quickly are more successful.
Meanwhile, Cresco's growth seems practically easy in comparison. The recreational marijuana market in its home state of Illinois is booming. Cresco has a great opportunity in Arizona's new recreational marijuana market. The company also has expanded into Florida's growing medical cannabis market.
Some might see nothing but exercised warrants with Sundial's recent transaction. I see a company that has to undertake such deals to stay in business while it continues to lose money in a very challenging Canadian market. Those 98,333,334 warrants remind me that there are other cannabis stocks -- notably Cresco Labs -- that don't have those problems. Sundial isn't a great stock to buy right now because other stocks are much better choices.