There's good news and bad news for Sundial Growers (NASDAQ:SNDL).

First, the good news: The Canadian cannabis producer plans to buy back up to 100 million Canadian dollars' worth of its shares. This announcement caused the stock to pop last week. The bad news, though, is that even with the bounce, Sundial's shares are down nearly 70% year to date. 

You might think that the combination of a solid stock repurchase and a beaten-down share price would give Sundial an attractive valuation. That's not the case, though. Here's why Sundial is still absurdly overvalued.

A cannabis leaf on top of $100 bills.

Image source: Getty Images.

Expensive no matter how you look at it

Sundial's shares currently trade at more than 25 times trailing-12-month sales. That price-to-sales ratio gives the cannabis company a nosebleed valuation. But what about Sundial's forward sales multiple? The picture doesn't look encouraging there, either.

Sundial's net cannabis revenue in the third quarter was CA$14.4 million, a solid improvement from the prior-year period and the previous quarter. If we assume that the company can generate that amount each quarter next year plus deliver 20% year-over-year growth, the stock's forward sales multiple would still be in the high 20s. 

However, Sundial also focuses on cannabis investments. It seems reasonable to expect that those investments would bump up its total revenue. Shouldn't this make the stock's valuation more appealing? Theoretically, yes. In the real world, no -- at least, not based on the company's Q3 results.

Sundial's investment revenue in the third quarter was a negative CA$4.8 million. The problem was that the company had unrealized losses on some of its investments. Including Sundial's investments at this point would make the stock appear even more overvalued.

Meanwhile, leading Canadian cannabis producers, including Canopy Growth, Aurora Cannabis, and Tilray, trade at much lower price-to-sales multiples. No matter how you look at it, Sundial Growers stock is expensive.

Positive steps

To be sure, Sundial is making some positive steps. As already mentioned, the company's cannabis revenue continues to grow. That's encouraging considering the challenging Canadian cannabis market conditions right now.

Sundial's bottom line is improving as well. The company reported net earnings of CA$11.3 million in Q3. That was a lot better than the CA$71.4 million loss in the prior-year period.

It also posted adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of CA$10.5 million in the third quarter. In the same period in 2020, Sundial recorded an adjusted EBITDA loss of CA$4.4 million.

In addition, Sundial's balance sheet is strong. The company had a cash stockpile of CA$1.2 billion as of Nov. 9 with no outstanding debt on its books.

A game-changer?

We've been talking about Sundial's business as it stands now thus far. However, the company has a potentially game-changing deal on the way. Sundial announced in October that it plans to acquire Alcanna (OTC:LQSIF) for CA$326 million. 

Alcanna ranks as the largest private liquor retailer in Canada. It has 171 stores, primarily in Alberta. The company is on track to achieve revenue of close to CA$690 million this year. Over the last 12 months, Alcanna generated free cash flow of CA$16.4 million. 

Sundial must win the approvals of the Canadian government and its shareholders for the transaction to close. Assuming there aren't any roadblocks, though, the Alcanna acquisition will significantly change Sundial's key valuation metrics.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.