Please ensure Javascript is enabled for purposes of website accessibility

Is Sundial Growers a Buy?

By Zhiyuan Sun - May 14, 2021 at 6:50AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This pot grower is in a lot of trouble, but it may make a surprising comeback.

Sundial Growers (SNDL 8.30%) has been a major flop in its attempt to capitalize on the Canadian marijuana industry. Due to overexpansion, lack of brand quality, and supply gluts, the firm's pot sales have plummeted in the past year. Meanwhile, Sundial took advantage of a rise in share price from a retail frenzy to issue stock and raise cash. The firm's outstanding shares went from less than 200 million last July to 1.86 billion as of this month. 

The house of cards came down fast. Since February, the stock has lost an astonishing 75% of its value. Is there any reason why investors should keep holding on to their Sundial shares?

Man harvesting cannabis in a hemp field.

Image source: Getty Images

Truly terrible results

During the first quarter of 2021, Sundial's gross revenues declined by nearly 30% year over year to 7.2 million Canadian dollars. There was a dramatic decline across all of the company's vape, dried flower, and oil segments. Only Sundial's concentrates outperformed, but that brought in just CA$504,000 in revenue. 

What's more, the firm sold 3,989 kilograms (8,794 pounds) of dried cannabis in Q1 2021, which wasn't that bad compared to the 4,437 kilograms (9,782 pounds) it sold in Q1 2020. This indicates Sundial likely had to make severe cuts in pricing in order to get its pot products to move off the shelves. 

The company did post earnings from operations of CA$1.7 million compared to a loss of CA$13.6 million in Q1 2020. However, keep in mind that this is a company with a market cap of $1.245 billion. The progress is nearly negligible, especially in the face of the continued unpopularity of its brand.

An unlikely transition

Whenever the results are this bad, the first thing investors usually think of is ditching the stock and looking for alternatives. I think otherwise; Sundial actually may have a shot at unlocking shareholder value this time, not to mention its stock is too heavily shorted. 

Don't get me wrong; I'm not saying that one should buy the stock and hope Sundial will turn around its pot sales. Instead, Sundial could be considered a buy in its new role as a cannabis financier rather than a cannabis operator. 

Sundial raised over $1 billion in cash from selling stock and used the funds to completely eliminate its debt balance. After that, the money went to financing other dispensary chains and acquisitions. On Feb. 22, Sundial made a CA$22 million debt and equity investment in Indiva. Sundial has already shown that its acquisition of Indiva might be starting to pay off. In Q1 2021, it earned CA$2.8 million in interest income and CA$12.9 million in capital gains. On April 23, the firm pooled CA$188 million into a joint venture with SunStream Opportunities L.P.

Sundial then bought a 10.1% stake in cannabis producer The Valens Company on May 4. The day after that, it announced plans to acquire the Inner Spirit Holdings and Spiritleaf Retail cannabis networks for CA$131 million. 

As of May 7, Sundial still has CA$752.7 million in cash remaining. If we subtract that value from its market cap, then the company's enterprise value stands at only $600 million. Keep in mind that this does not account for the value of Sundial's investments.

What's the verdict? 

Sundial is working to transform itself into a pot fund in the face of disappointing operations. Investors who like the risk-reward profile may wish to buy a small stake. If that doesn't fit your own risk-reward tastes, there is no shortage of other hot marijuana stocks out there today.

Zhiyuan Sun has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Valens GroWorks Corp. The Motley Fool recommends Valens GroWorks. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

SNDL Inc. Stock Quote
SNDL Inc.
SNDL
$3.00 (8.30%) $0.23

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
389%
 
S&P 500 Returns
125%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/12/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.