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Why Sundial Growers Could Face Big Challenges in 2022

By David Jagielski – Dec 22, 2021 at 6:46AM

Key Points

  • This pot stock has been a bright spot in the sector this year.
  • As the retail cannabis market expands, Sundial Growers could face a significant cash burn next year.
  • With abating enthusiasm from investors, returns in 2022 could differ from the gains in 2021.

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Investors need to ask themselves if the risk is worth the potential rewards.

Sundial Growers (SNDL 8.22%) has enjoyed a relatively strong year on the markets. With gains of 26% in 2021, it has outperformed the Horizons Marijuana Life Sciences ETF, which is down by 17%. Sundial has risen in popularity this year as the company has been active in seeking out acquisitions and transforming its business.

But entering 2022, the cannabis company is facing some significant challenges, which will dictate how it performs in the new year. There are two problems, in particular, that investors need to be wary of and that could adversely impact its share price in the months ahead.

A person holding a bottle of cannabis oil.

Image source: Getty Images.

1. The company is in an ultra-competitive retail cannabis market

In October, Sundial announced that it was going to acquire liquor store operator Alcanna for 346 million Canadian dollars. In addition to owning over 170 liquor stores, Alcanna also has more than 60 pot shops in its portfolio through a majority position in Nova Cannabis. For Sundial, the transaction gives it even more exposure to the retail cannabis market, as in July, it completed its acquisition of Inner Spirit Holdings, which has more than 100 pot shops in Canada.

And while these moves will expand the company's operations and help increase its sales, it's by no means a slam dunk that Sundial will be a hot buy because of these transactions. A big part of that is because competition has been intensifying with the opening of more pot shops. As of Sept. 30, there were 1,115 retail stores in Ontario, Canada's largest province. That's more than six times the 183 stores that were there just a year earlier. While that represents just one province, in September, Ontario generated CA$141.6 million in retail cannabis sales and accounted for 40% of the total market in Canada. The province with the next closest total, Alberta, brought in less than half of that figure at CA$60.7 million.

The surge in pot shops is only going to make it more of a challenge to stay out of the red. Nova Cannabis, which Sundial might end up having a controlling interest in next year through its acquisition of Alcanna, has incurred a loss of CA$26 million on revenue of CA$62 million over the trailing 12 months.

2. Meme stocks have been declining in popularity

Another concern for investors is the waning excitement surrounding meme stocks in recent months. It's that popularity that helped Sundial perform so well this year. If not for its strong surge in value in February when the stock topped $3.96, Sundial's shares may not be in positive territory today. Down 85% from its peak, Sundail stock has seen a mammoth sell-off since it hit its 52-week high earlier this year. And online search data from Alphabet's Google Trends suggests the same thing -- interest in the company has gone from a score of 100 (which indicates the peak) in February down to just three right now. 

Without Reddit forums and retail investors driving up the stock price, Sundial Growers' stock may find it difficult to stay green next year. The company has burned through CA$173 million in cash flow from its day-to-day operations over the past 12 months, and taking on more acquisitions could accelerate that burn. Sundial has already been a dilution machine; the risk for investors is that more share offerings next year could set the stock up for some significant losses.

Should you take a chance on Sundial Growers?

Sundial Growers is an investment that's only suitable for high-risk investors. Unless you are OK with the potential to lose 50% or more of your investment, this is not a stock that you should consider buying today. If you want to gain exposure to the cannabis sector, there are much better options out there for investors

Next year could be a tough one for Sundial Growers, and I'm not optimistic that the stock will be able to reproduce the gains it has generated in 2021.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. David Jagielski has no position in any of the stocks mentioned. The Motley Fool owns and recommends Alphabet (A shares) and Alphabet (C shares). The Motley Fool has a disclosure policy.

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