Though all eyes seem to be on tech stocks, it's marijuana that could surprise and be the decade's most impressive growth story. Throughout North America, the pot industry is budding.
In the U.S., more than 70% of all states have given the green light to medical cannabis, with 15 (soon to be 16) also allowing recreational cannabis consumption and/or retail. According to New Frontier Data, annualized cannabis sales growth in the U.S. should equate to 21% between 2019 and 2025, leading to as much as $41.5 billion in annual awed sales by mid-decade.
Meanwhile, Canada's cannabis industry is showing signs of maturation. Following multiple early stage miscues, important provinces (ahem, Ontario) are opening a number of new dispensaries and alleviating supply bottlenecks. Marijuana-focused research firm BDSA projects that Canadian weed sales can jump from $2.6 billion in 2020 to $6.4 billion by 2026.
With Mexico also waving the green flag on marijuana, we could be looking at a $50 billion industry in North America by 2025.
Investors have grown an affinity for Reddit stock, Sundial Growers
Currently, Sundial is the fourth most-held stock on online investing app Robinhood, which is a haven for millennial and/or novice investors. Let's remember that favorability toward cannabis increases as age decreases. Thus, it shouldn't be a surprise that some of the most ardent supporters of pot stocks are young investors.
These folks are crossing their fingers for cannabis reform in the United States. Marijuana is a Schedule I drug at the federal level, putting it on par with LSD and heroin. It has no recognized medical benefits and is entirely illegal. However, with Democrats taking control of the Senate and Joe Biden in the White House, the prospects for legalization have never been more favorable. If the U.S. federal government were to act, Canadian licensed producers like Sundial would be able to enter the lucrative U.S. cannabis market.
Sundial investors also appear to be enamored with the company's balance sheet. As of March 15, 2021, it had $719 million Canadian ($570 million U.S.) in cash and no debt. This makes it one of the most cash-rich pot stocks and should give it more than enough flexibility to execute on its various growth initiatives.
Lastly, Sundial has been caught up in the recent Reddit frenzy. Retail investors have targeted companies with high levels of short interest, and Sundial certainly fits the bill. Last month, it had one of the highest short interests, relative to float, of any company with at least a $300 million market cap.
Important question: When will Sundial deliver the green?
Although Sundial has had a remarkable five-month rally, and retail investors have established themselves as a force on Wall Street, it's important not to overlook the importance of operating results in driving sustainable movements higher or lower in a company's valuation. With its market cap vaulting higher by 7,000% in six months (not a typo), the question has to be asked: When will Sundial be profitable?
According to Wall Street, it's going to be a while. After losing over $1 per share in 2020, which was the result on numerous asset writedowns and impairments, Sundial is expected to lose $0.01 per share in 2021 and 2022. By 2023, the Wall Street consensus is for $0.01 in profit per share.
Losing only a penny per share probably doesn't sound all that bad for a company transitioning from wholesale cannabis to retail, and is therefore having to build up its brands from the ground up. But understand that Sundial has 1.66 billion shares outstanding. A loss of $0.01 per share, rounded down, could still equate to a net loss in excess of $20 million.
It's possible Sundial could turn the corner to profitability quicker if it were to make a sizable acquisition that became accretive quickly, or if the U.S. waved the green flag on cannabis. The latter, however, isn't as likely as you might think. President Biden has shied away from the legalization debate and only promised to decriminalize and reschedule pot during his election campaign.
In other words, Sundial could be one of the very last North American pot stocks to turn the corner to recurring profits.
Here's an even bigger concern
Perhaps even more worrisome than the company's uninspiring bottom line is the disregard the company's management team has shown for shareholders. In order to rid the balance sheet of debt, management oversaw the issuance of 1.15 billion shares of stock in five months. I can count on one hand -- and wouldn't need all my fingers -- how many times I've seen a company bury investors in more than 1 billion shares of newly issued stock under one years' time.
Even when Sundial does turn the corner to profitability, it's going to be extremely difficult for the company to generate juicy enough profits to command a share price above the Nasdaq exchange's minimum listing price of $1. For instance, $20 million in profit on $100 million in sales still only works out to $0.01 in per-share profit, which would equate to a price-to-earnings ratio of more than 100, based on last weekend's close.
What's more, it's not clear that Sundial is finished diluting its investors. It recently filed a prospectus that would allow it to sell up to $800 million in common stock via at-the-market offerings. Based on its $1.13 close, we're talking about more than 700 million new shares potentially being issued over time.
Though Sundial's cash sets a share price floor on the company of around $0.35 to $0.40, anything above this point looks to be purely speculative. Sundial's projected revenue growth trails the vast majority of North American pot stocks, and management doesn't have well-defined plan for its cash. It's quite possibly the worst pot stock investors can buy.