If this were a battle between meme stocks, it wouldn't be a close contest whatsoever based on year-to-date performance. Sundial Growers (SNDL 3.08%) has certainly been a big winner so far this year with its shares nearly doubling in value after soaring more than 500% at one point. But AMC Entertainment (AMC 3.96%) easily beats Sundial with a jaw-dropping gain of more than 2,400%.
However, the past is the past. What really matters for investors is how a stock might perform going forward. Here are three reasons why Sundial Growers could be a bigger winner than AMC over the next five years.
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1. The trend is its friend
I don't doubt that AMC's financial fortunes will improve in 2021 and 2022 as moviegoers return to theaters. But what happens for the company and its stock once attendance reaches pre-pandemic levels? The number of tickets sold each year was declining before COVID-19 hit. There isn't a compelling reason to think that trend will reverse course in the future.
Meanwhile, the trend is a friend to Sundial Growers. Even with the shutdowns in 2020, total adult-use cannabis sales in Canada more than doubled year over year. Cannabis market researcher Brightfield Group projects that adult-use cannabis sales will jump another 60% by the end of this year.
To be sure, Sundial's revenue didn't increase in 2020. Several of the company's problems were self-inflicted, although pricing pressures in the Canadian cannabis market also presented a challenge. Sundial has made changes to improve its cultivation and focus on more attractive market segments.
It's a lot easier to succeed when the overall trend works to your advantage. That's the case for Sundial but isn't for AMC.
2. A less lofty valuation
Sundial isn't a cheap stock by any stretch of the imagination. Its shares currently trade at 11 times sales. We can't use earnings-based valuation metrics, because the company isn't profitable yet.
While Sundial's price-to-sales (P/S) multiple is steep, it's still lower than several other Canadian marijuana stocks. For example, Canopy Growth's shares trade at nearly 20 times sales. Cronos Group's P/S ratio is more than 58.
More importantly, Sundial's valuation is much cheaper than AMC's. Shares of the theater chain operator currently trade at more than 22 times sales.
Will AMC's P/S ratio improve? I think that's a near certainty to happen as the company's sales rebound. However, I expect that Sundial's sales will increase also. Because the cannabis operator's valuation isn't as lofty as AMC's is, its stock could perform better as its sales rise.
3. The possibility of a game changer
I think that there's a real possibility that a game changer could be on the way -- one that could directly benefit Sundial Growers. The U.S. could implement federal cannabis reform that paves the way for Canadian companies to enter the U.S. cannabis market.
My view is that we will see a flurry of mergers and acquisitions if this happens. I expect that Sundial will be among the Canadian cannabis companies that quickly move to expand south of the border.
There's no guarantee that Sundial would be successful in the U.S. market should federal cannabis reform be enacted. However, the opening up of such a huge new opportunity for the company would likely send its shares soaring.
Is there a similar potential game changer for AMC? I don't think so.
Putting the hype aside
Sundial could very well be a bigger winner than AMC over the next five years for the three reasons mentioned above. I don't think, though, that Sundial has been worthy of all of the hype that it's received.
The company still faces significant challenges to turn its cannabis business around. It also will likely have to further dilute its stock to raise additional capital for investing in other cannabis businesses. My take is that there are better stocks to buy right now that will be bigger winners than both Sundial and AMC over the next few years.
