Sundial Growers (SNDL 2.58%) has been a popular stock with retail investors this year. They were behind the company's rapid ascension in early February when its share price peaked at $3.96. Although the stock hasn't reached that price since then, this is the type of investment that can quickly rally on good news.
And last week, the company did appear to give retail investors something to rally about when it reported its latest earnings results. But was it really as good as the 28% jump in price on earnings day suggested it was, or were investors getting ahead of themselves?
An accounting profit and a positive adjusted EBITDA figure
Normally, marijuana companies target a positive earnings before interest, taxes, depreciation, and amortization (EBITDA) number because it backs out non-cash expenses and other items that may be non-recurring or otherwise not helpful in evaluating the strength of the business' performance.
For the period ending Sept. 30, Sundial posted a healthy adjusted EBITDA profit of 10.5 million Canadian dollars -- up from a loss of CA$4.4 million in the same quarter last year. The company credits the improvement to higher revenue (which included contributions from the recently acquired cannabis retailer Spiritleaf) plus gains and profits on investments. The latter played a much bigger role, however, as Sundial's net revenue of CA$14.4 million this past quarter was only 12% higher than the CA$12.9 million in reported in the prior-year period.
Sundial's net income of CA$11.3 million was also a big turnaround from the CA$71.4 million loss it reported a year ago. And while it was an improvement, investors should be careful not to assume that this means the company has suddenly become a profitable business. Sundial still reported an operating loss of CA$18.8 million, and if not for an income tax recovery of more than CA$10 million plus a CA$24 million fair value change in derivative warrants that boosted its bottom line, it again would have been firmly in the red. In each of the four previous quarters, Sundial has reported both a net loss and an operating loss.
Its cash burn worsened
During the last quarter, Sundial used more than CA$56 million on just its day-to-day operating activities -- nearly three times the CA$20 million it burned through a year ago. And on a year-to-date basis, that figure swells to CA$161 million (versus CA$45 million last year).
Due to the stock's popularity and multiple offerings this year, Sundial is in a stronger cash position than it was a year ago; cash and cash equivalents of CA$629 million as of Sept. 30 are more than 10 times what Sundial had on the books at the end of 2020. But that could all be for naught if the company is burning through more cash while also adding more businesses into the mix that may only add to that burden.
A positive quarter for Sundial, but don't get carried away
News of a cannabis company posting positive adjusted EBITDA can create a lot of excitement, especially since many of Sundial's peers struggle with hitting breakeven. But the company didn't get there because of its core operations -- investments played a big role, and its bottom line benefited from fair value changes and a favorable swing in tax expenses. The danger is that those can be one-time items that don't recur and Sundial swings back into the negative next quarter.
I wasn't expecting much from the company in this quarter's results simply because it's still too early to see how the integration with the new businesses Sundial has acquired will shake out; it only closed the Spiritleaf acquisition on July 20 and its deal to buy liquor store operator Alcanna might not be completed until early next year.
Investors should resist the urge to act on the company's positive adjusted EBITDA profit -- it posted a surprise profit back in May for the period ending March 31, only to go back into the red the following quarter. Sundial was a risky buy before and these results don't change that now. Investors only need to look to the wild CA$24 million swing in fair value (almost double the company's revenue) just in warrants as a reminder that dilution with this stock is never too far away.