Sundial Growers (SNDL +2.33%) is one of the major marijuana stocks investors like to dump on, and sometimes with good reason. The company has been known to make moves that hurt its credibility with investors.
Yet it does have a large cadre of followers, particularly from its early days as a Reddit meme stock favorite, and it has the potential to be a good business (if not always a good investment). For longer-term investors, let's see where this Canadian cannabis producer might be in three years.
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Flooding the market with cheap paper
One of the biggest knocks against Sundial Growers is its penchant for diluting shareholders. While many of the marijuana stocks that have gone public in the past few years have issued more stock to raise cash, Sundial has been especially busy doing it, unleashing a tsunami of shares over the past two years that increased the share count by 2,150%.
If you want to know why Sundial is an actual penny stock these days, look no further than its nonstop share issuance. There are over 1.6 billion shares outstanding today.
But the cannabis grower just announced it would buy back shares worth 100 million Canadian dollars ($79.5 million) in an effort to lift the stock over the $1 share price needed to maintain compliance with Nasdaq exchange rules. Even so, it's limited to reducing the share count by just 5%, or around 103 million shares, and it's not obligated to actually follow through on the buyback.
If there is one upside to Sundial's dilutive practices, it's that the company is flush with cash. It just reported having CA$571 million at the start of the month and has some CA$1.2 billion total in cash, marketable securities, and long-term investments.
Although Sundial was profitable in the third quarter, reporting adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of CA$10.5 million versus a loss of CA$4.4 million last year, revenue from its cultivation and production continues to decline, dropping 11% year over year.
It's also notable that Sundial used the proceeds from its stock sales to completely pay off the long-term debt on its balance sheet.
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New opportunities opening up
However, the pressure that Sundial is under, and the marijuana industry as a whole is feeling, necessitated the pot stock restructuring its business so it could focus on operating at sustained profitability.
Its cash position gives it a buffer, but Sundial is now branching out into the retail market to boost sales following its acquisition of retailer Inner Spirit Holdings and its Spiritleaf brand. And last month Sundial acquired Canadian liquor retailer Alcanna in an all-stock deal valued at CA$346 million.
Becoming a vertically integrated marijuana company gives Sundial more levers to pull and further diversifies its business. By owning retail locations where it can sell its premium cannabis, Sundial could become an effective industry player. CEO Zach George said, "We remain focused on sustainable profitability and continued improvement in all aspects of our operations."
George also said Sundial would become free cash flow positive in 2022. Free cash flow is the money a business has left over after paying all the bills to reinvest in the company.
Image source: Getty Images.
Management still eyed suspiciously
Wall Street seems on board. Analysts forecast Sundial Growers can increase revenue from CA$73.3 million last year to around CA$705 million in 2022 and as much as CA$1.1 billion by the end of 2024, at which time it will be generating $0.03 per share in profits.
That's hopeful, but investors do need to be worried about just how dependent on dilution the management team actually is. Buying back stock merely to maintain exchange-listing requirements doesn't reflect a true commitment to avoid future dilution.
Analysts don't seem hopeful, either. Even though Sundial's stock was trading at just $0.79 per share, they have a consensus price target of $0.73, indicating 6% more downside, at least over the coming year.
And that is the investor's dilemma with Sundial Growers: The business should do well for itself over the coming years, but management needs to prove it truly can prioritize shareholders' interests. It hasn't done that yet and will need much more than one stock buyback plan to show that the marijuana company is one to invest in because it wants everyone to profit equally.
