There's only one company in the world that can credibly claim to be a cannabis cultivator, liquor store chain, and a cannabis investment bank all in one, and it's Sundial Growers (SNDL -1.21%). The meme trader favorite and Canadian penny stock just reported its earnings for the first quarter of 2022, and things aren't exactly rosy. Profitably selling marijuana continues to be elusive, and some of the warts of its investments are starting to show.
Still, it doesn't have any debt whatsoever, and its war chest has more than CA$422.8 million to spend, so it's in no danger of collapse just yet. Let's examine three red flags and one green flag to see what's going wrong and what's going right.
Image source: Getty Images.
1. Shrinking cannabis sales
The first red flag is that Sundial's revenue from cannabis is still shrinking year over year. Out of CA$17.6 million of net revenue, it brought in net cannabis cultivation revenue of CA$8.7 million in the first quarter, compared to CA$9.8 million in the same quarter last year. This is because it simply sold less marijuana to key customers like licensed producers and provincial regulatory boards. In the first three months of this year, it turned over 3,371-kilogram equivalents of cannabis, whereas, in the same period of 2021, it cleared 3,989-kilogram equivalents. If management aims to keep cannabis at the core of the company's business model, at some point it'll need to start increasing its market share.
2. The pivot to higher-value cannabis products is struggling
Like many other marijuana businesses, Sundial is attempting to transition its product mix away from low value-added items like bulk cannabis flower and toward products like vaporizers, concentrates, and edibles, which can be priced more aggressively and deliver higher profits as a result. Succeeding in this goal would result in higher average selling prices per gram sold, as well as a lower cost of goods sold (COGS) as a percentage of revenue. Per its earnings, that's in progress, as its net revenue per gram sold rose to CA$2.60 in Q1 compared to CA$2.48 in the first three months of last year.
The trouble is that revenue from key high value-added product segments like marijuana oils and vapes appear to be collapsing sharply rather than growing. Sales of oils shrank from CA$181,000 in Q1 of 2021 to a mere $27,000 in the first quarter of 2022. And vaporizer revenue plunged from over CA$1.4 million to CA$531,000. While revenue from edibles and concentrates did grow by more than threefold year over year, it's the only high value-added product segment that grew at all.
3. Investment losses loom large
The final red flag is that Sundial's investments in shares of other public Canadian cannabis businesses like Village Farms International have led to gruesome (but unrealized) losses exceeding CA$17.7 million. For reference, Village Farms' stock has been down more than 63% in the last 12 months, whereas the wider market has only lost around 0.4%. Though the fact that the losses are unrealized means that there's no direct impact on Sundial's ability to compete, it does suggest that there might be safer or more productive places to invest now that market conditions have shifted to be firmly against marijuana stocks.
It's not all bad
Despite the above, there is one green flag for investors to feel good about with Sundial: The Alcanna acquisition is done, and it'll soon start to yield considerable revenue. In the first quarter, Alcanna profitably sold CA$162.5 million in alcohol. Sundial's acquisition closed on March 31, so only one day of the liquor distributor's income was registered on its Q1 earnings. But, that won't be an issue for the second quarter, so investors should expect a huge jump in the company's top and bottom lines. And that's a silver lining that just might eventually pave the way for the business to have a profitable future.
