As a result of being a favorite among meme stock traders, Sundial Growers (SNDL -0.32%) isn't a typical cannabis company. With a market cap of $1.3 billion and trailing revenue of 47.2 million Canadian dollars ($36.5 million), Sundial is neither profitable nor rapidly growing.
While there's reason to believe that those conditions could be improving, there's also a strong chance investors could do better by looking elsewhere. Let's consider one argument in favor of buying Sundial stock and one argument against it to determine if it's a good choice to add to your portfolio.
Bull case: Rising efficiency and an acquisition both bode well
Alex Carchidi: Though it's a risky stock to be sure, Sundial's turnaround story is on the verge of bearing fruit. Sundial has two business segments: cannabis cultivation and retail operations, and its investment operations.
Yields from its cannabis crops are higher than ever before, with 50 grams (1.8 ounces) produced per square foot of cultivation space. And, cannabinoid yields are breaking records, with the company's plants producing their highest percentages of THC since its inception. At the same time, its gross average selling price per gram of cannabis in the third quarter was CA$3.23 ($2.50), which is significantly higher than the CA$2.67 ($2.07) per gram it reported in the same quarter last year.
Furthermore, total expenses have fallen as a portion of quarterly revenue by 9.5% in the last year. The combined trends of falling expenses, rising selling prices, and rising yields will soon be making major positive impacts on the bottom line.
Then there's the investment segment, which is currently working on an acquisition of Alcanna, a Canadian liquor chain that is also the majority shareholder in a major Canadian cannabis retailer. If Alcanna's shareholders agree to the purchase, Sundial will have the largest cannabis retail footprint in Canada, with around 180 stores. The transaction is expected to be worth a total of CA$346 million ($268 million) in stock, and it could close in Q1.
In sum, Sundial is working to supercharge its revenue-making potential, and next year could be highly lucrative for its investors.
Bear case: Too many better alternatives
Keith Speights: If you can find a better place to invest your money, you're better off not buying a given stock. And I think there's no doubt whatsoever that you can find better alternatives than Sundial Growers.
Sure, Sundial has improved considerably. The company posted a profit in its latest quarter. It's planning to acquire Alcanna. Sundial even announced plans to buy back shares. But none of that is enough to outweigh the fact that other stocks offer better risk-reward propositions.
You could find several U.S. multistate cannabis operators (MSOs) that are much more profitable than Sundial Growers is. I'll point out just two of them -- Green Thumb Industries and Trulieve.
Both Green Thumb and Trulieve, as well as many other U.S. MSOs, also have much stronger growth prospects than Sundial has. There's a simple reason why that's the case: Sundial can't compete in the massive U.S. cannabis market as long as marijuana remains illegal at the federal level. No one knows if and when federal cannabis laws will change.
We can't leave out a discussion of valuation, either. Sundial's shares currently trade at a much higher multiple to sales than most U.S. and Canadian cannabis stocks do. The valuation picture for Sundial should improve with the Alcanna acquisition, but that's not a done deal yet.
There are positive arguments to make in favor of Sundial. However, those same arguments can be made even more strongly for other stocks. When that's the case for a given stock, it's best to look elsewhere.
This isn't a stock for risk-averse investors
Regardless of whether Sundial can pull off its transformation and go on to outperform the market, it isn't the right investment for everyone.
Its business is far from being mature, and its unprofitability and weak revenue growth don't inspire confidence yet. If you're looking for a safe cannabis stock to appreciate in value steadily over time, Sundial definitely isn't it.
But if you're willing to take a gamble on a turnaround that appears to be working out so far, there's likely some upside for investors coming soon.