Canadian pot producer Sundial Growers (SNDL 10.11%) is in danger of having to do a reverse stock split to stay on the Nasdaq if it can't get its shares up. To avoid that, its shares need to get back up to at least $1.
Last year, the meme hype and retail investors propped up Sundial's stock much higher than that. Will that happen again in 2022?
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The meme hype may be over, at least for now
Data from Google (which Alphabet owns) shows that interest in Sundial has waned over the past year. When looking at the search data since the start of last year, searches for "Sundial Growers" peaked during the first two weeks of February 2021 and quickly tapered off. At a value of 100 during that time, the comparable data now shows the search interest down to a value of just four -- suggesting a more than 95% drop in traffic.
That's troubling for the stock because if it is no longer a popular meme investment, Sundial will be on its own. It will need to post some encouraging quarterly results to get investors excited about the business in order for it to climb back over $1.
March could be a big month for Sundial Growers
This month, Sundial will likely release its fourth-quarter numbers for the period covering the last three months of 2021. The company last reported its earnings on Nov. 11, 2021, when it posted an adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) profit totaling 10.5 million Canadian dollars (versus a loss of CA$4.4 million in the prior-year period). Its revenue growth was less impressive, with net sales of CA$14.4 million for the period ending Sept. 30, 2021, rising just 12% year over year.
The strong earnings report sent shares of Sundial soaring to more than $0.90 (at the start of the month, it was trading at around $0.65). But shortly after, the stock would end up crashing back down. Growth stocks as a whole haven't fared too well in recent months, and Sundial's hefty valuation surely doesn't help the matter.
At a price-to-sales (P/S) multiple of more than 20, investors are paying a significantly higher multiple than the six times revenue they are for Canopy Growth, which at one time was the top cannabis company in Canada. Tilray owns that distinction today, and it trades at an even lower P/S multiple of less than four.
For Sundial, the key test will be whether it can continue posting positive adjusted EBITDA numbers while growing its sales. Another catalyst that could help the company this month is Sundial closing on its acquisition of liquor store operator Alcanna, which would help diversify its business. Alcanna also has a majority stake (63%) in Nova Cannabis, one of the largest cannabis retailers in Canada. Completing the move would certainly strengthen Sundial's prospects for long-term revenue growth. Currently, the companies expect the deal will close by March 30.
Investors shouldn't count on Sundial's shares taking off in 2022
Given where the markets are today, I'm not overly optimistic that even a strong earnings report would get Sundial back to $1 (without having to resort to a reverse split). Unless marijuana legalization takes place in the U.S. this year, which I don't see as anything but a long shot, it appears unlikely that Sundial's shares could double all on their own.
The good news for investors is that a reverse split doesn't make the stock any worse of a buy, just like how a regular stock split doesn't mean a stock is a better buy. The only difference is that a reverse split has a more negative connotation, especially in a situation where it may be necessary to get the stock price up over a minimum value for it to stay on an exchange.
Investors taking a chance on Sundial should be aware that there's significant risk ahead for the business. While it is coming off some encouraging results, with consumers tightening their wallets amid record-high inflation numbers around the world, some tougher times may be ahead for Sundial and other cannabis companies. Its high valuation does the stock no favors, and waning popularity is another reason why its shares may continue to struggle this year.
