It has been a volatile year for cannabis producer Sundial Growers (SNDL 1.83%). At one point, shares of the company were up more than 400% in 2021. And although they are still up about 90% year to date and have significantly outperformed the S&P 500's gains of just 11%, things have clearly cooled off. 

There have been no recent developments to suggest things have gotten any worse for the company; instead, it's likely that the Reddit-fueled hype that sent the stock to highs of nearly $4 a share is simply no longer there. With tons of cash on its books and Sundial looking for a deal, this is a stock that still has plenty of potential to rise in value. But the big question is whether the price is low enough that it is now worth the risk.

Man inspecting cannabis plant with magnifying glass

Image source: Getty Images.

It still isn't suitable for risk-averse investors

A drop in price doesn't mean investors should ignore the risks involved with Sundial. The company is in the midst of a transition. Not only is it exploring acquisitions, but its business is also moving away from wholesale and toward branded retail. If Sundial doesn't find a good deal out there and the change in strategy doesn't pay off, there could be plenty of room for the pot stock to fall from its $1.5 billion valuation. With a price-to-sales multiple of 5.4, it is slightly more expensive than Aurora Cannabis, which trades at 4.7 times its revenue. But Aurora is a much larger company, with revenue totaling 286 million Canadian dollars over the trailing 12 months, while Sundial has generated just CA$61 million in its past four quarters. Aurora also has a much larger footprint than just Canada, with a presence in 25 countries.

In its most recent quarterly earnings, released March 17, Sundial posted an adjusted EBITDA loss of CA$5.6 million for the period ending Dec. 31. That was 28% higher than the CA$4.4 million loss it incurred in the previous period, despite an 8% increase in revenue. If the company doesn't find a way to improve its financials, the pot stock's losses could continue indefinitely. But despite these challenges, there are reasons investors may still prefer Sundial over other options.

Why Sundial could make a good investment

Sundial is a high-risk, high-reward investment. There are no guarantees of what its business will look like a year from now. And one of its key assets right now is its stockpile of money. With unrestricted cash of CA$719 million as of March 15, there are plenty of options out there for Sundial if it wants to scoop up a competitor and advance its position in the industry.

In a sense, Sundial could make for a safer investment than buying shares of a special purpose acquisition company (SPAC). SPACs, or "blank check" companies, have been popular investments this year, with investors betting that they will land some great deals to send their valuations through the roof. Churchill Capital Corp IV is one of the more popular examples, and its stock has followed a similar path to Sundial's this year. And while Churchill will be merging with Lucid Motors, many other SPACs out there have not secured such deals.

Betting on a SPAC can be dangerous, as there is no underlying business and no guarantee that a deal will happen. With Sundial, at least you are investing in a company that has an existing business it can fall back on if it doesn't find a company to merge with or acquire. And from that angle, it can be a worthwhile investment for investors who are OK with the level of risk involved.

Is Sundial a buy?

Shares of Sundial have cratered by around 40% in just the past month, while the S&P 500 has risen by more than 6%. But despite the discount in price, I would still hesitate to invest in the company right now. This is a stock that was trading below $0.20 less than six months ago, and that should serve as a reminder to investors of just how low shares of Sundial could potentially fall.

Although the business is in a stronger financial position today, I don't see a reason why it should be trading at a higher valuation than Aurora Cannabis. And that is why, despite the drop in value, Sundial is still not cheap enough to buy, especially with so many question marks surrounding the business.

Sundial may be suitable for SPAC investors looking to minimize some of their risk. But beyond that, the pot stock isn't cheap enough to be worth the risk. There are much more promising cannabis investments out there to choose from.