Sundial Growers (SNDL -2.81%) has been a perplexing stock to watch this year. It doesn't have a pending U.S. acquisition in place like Canopy Growth does with Acreage Holdings, and it hasn't closed on a huge deal like Tilray recently did with Aphria. And yet, it has been one of the top-performing cannabis stocks in 2021, doubling in value while the Horizons Marijuana Life Sciences ETF has risen by just 35%.
The company can thank retail investors and the meme-stock craze earlier this year for those impressive gains. But now that things have settled down, it may be a good time to take a closer look at this pot stock to see if it's worth investing in -- and if its share price could double yet again.
Is there any reason besides just speculation to invest in the stock?
Even before the meme hype sent the stock soaring, Sundial Growers was already generating increasing interest from investors when it released its second-quarter earnings results on Aug. 13. Trading volume climbed to more than 60 million on the day, whereas on a single day a week earlier, fewer than 2 million shares had traded hands. The interest has been growing ever since, and now it isn't uncommon to see Sundial's trading volume climb to over 100 million on any given day.
The big news on earnings day wasn't so much the quarterly performance -- net revenue of 20.2 million Canadian dollars for the period ending June 30, 2020, was up just 5% from the prior-year period. The most noteworthy item was arguably news that Sundial initiated a "strategic alternatives review" that may or may not result in a transaction. Although Sundial has made some moves since then, including an investment in edible producer Indiva, there hasn't been a blockbuster deal like the one including Tilray and Aphria that shook the industry last year. And such a deal may be what investors had been hoping for.
Based on financial performance, there just isn't a reason to justify the current level of interest in the company. Over the past 12 months, Sundial's sales totaled just $57 million Canadian dollars. Another Canadian cannabis company, OrganiGram, which has brought in CA$72 million in revenue over its past four quarters, has just a fraction of the trading activity that Sundial does:
That leads me to believe that Sundial has simply become a meme stock. And while news or Reddit forums could help move the stock, financials may be an afterthought for speculators. That makes the stock a risky buy, since it's unpredictable where it may go from here. While doubling is certainly a possibility, so too is falling back down to its 52-week low of less than $0.14.
How does its valuation compare to other cannabis companies?
One way to try to assess Sundial's fair value is by comparing it to others in the industry. Smaller companies such as OrganiGram, Village Farms International, and Valens could be more suitable comparisons than big names like Tilray and Canopy Growth. Here's how Sundial compares against these businesses when looking at their respective price-to-sales ratios:
Sundial is clearly the more expensive buy. That again poses a problem, because if there is a shift in the markets and investors start paying close attention to valuations, the pot stock could be a prime target for a sell-off given its inflated price tag.
Sundial can double your money, but it isn't worth the risk
Another surge in interest from retail investors could send Sundial back to its highs of nearly $4 a share. But that possibility shouldn't be a reason to invest in the business today.
And although I like the fact that as of May 7, it had unrestricted cash of CA$753 million on the books -- more than enough to cover the CA$78 million in cash it burned through over the past 12 months from its day-to-day operating activities -- that simply buys the company time to strengthen its business or to make a more meaningful acquisition. Just like an investor with money sitting idle, Sundial isn't doing a whole lot with its stockpile of cash.
Today, there isn't much of a reason to buy shares of the company; in fact, its high valuation could make it a dangerous investment to be holding in your portfolio. If you're looking for a cheap stock that can quickly rise in value, there are better growth investments to consider.