What happened

Shares of Sundial Growers (SNDL -4.31%) fell 15% last month, according to data provided by S&P Global Market Intelligence, after the cannabis company moved to further dilute shareholders and an analyst issued a dire forecast for its stock.

So what

Canaccord Genuity analyst Shaan Mir cut his rating on Sundial from hold to sell on March 19. Mir placed a $0.65 price target on the marijuana stock, representing potential losses for investors of roughly 55% from its price at that time. Mir's bearish forecast came after Sundial's fourth-quarter financial report, which saw its net revenue fall 6% year over year, to 13.9 million Canadian dollars ($11 million). 

A downwardly sloping stock chart.

Sundial Growers' stock price has pulled back violently in recent weeks. Image source: Getty Images.

Investors were also displeased when Sundial filed a prospectus that would allow it to sell up to $800 million worth of new stock. Sundial noted in the filing that its shares had risen sharply in recent months despite "no recent change in our financial condition or results of operations," which may have prompted some shareholders to reevaluate whether the move was justified. Investors were also no doubt disconcerted by the potential for their ownership stakes to be significantly diluted by new share offerings. 

Now what

Despite its recent decline, Sundial's stock price is still up more than 130% so far in 2021. Investors appear to be pricing in a successful transition from primarily wholesale cannabis sales to higher-margin branded retail products, as well as management's ability to make value-creating investments with Sundial's sizable cash reserves.

Sundial has made significant progress with its retail transition; branded net cannabis sales rose to 75% of its total cannabis sales last year, up from 20% in 2019. Yet whether management can deploy shareholders' capital in a manner that will more than offset the dilution brought about by Sundial's large stock sales remains uncertain.