If there was a realistic chance of a turnaround in the near future, would you be willing to buy a stock that's down 97% in the last three years? If you're thinking of buying shares of the meme stock SNDL, (SNDL 1.72%) (formerly known as Sundial Growers), that's not a hypothetical question. After the Canadian cannabis company diversified into selling liquor via an acquisition, it's clear that its future won't be much like its past, and that could mean that the door is open for a rally.
Still, SNDL is hardly a safe stock. It isn't profitable, and its cannabis operations continue to struggle amid a supply glut that's driving down prices. Is there a long-term case to make for investing, or is its focus too divided across its different segments to justify buying right now?
The bull thesis for SNDL
There are a few reasons investors might expect SNDL to be a good investment, starting with its freshly diversified operations.
Thanks to its purchase of Alcanna, a Canadian liquor business, the company is now the biggest non-government distributor of liquor and cannabis in Canada. In the second quarter alone, sales of liquor totaled CAD$148.6 million, whereas revenue from cannabis retail, cultivation, and production totaled about CAD$75.1 million. For reference, in all of 2021, it brought in just over CAD$56.1 million from all of its segments combined, so the addition of liquor revenue is a massive contribution. And, as demand for liquor isn't expected to grow or shrink by very much over the next few years, according to a report by BlueWeave Consulting, those sales should lead to a long-term or even permanent boost to SNDL's earnings.
Plus, in the eyes of bulls, the excess inventory in the Canadian cannabis market is likely to be temporary, as the oversupply will eventually wash out until demand roughly matches output. At that point, as the largest distributor, SNDL could more readily earn a profit on its marijuana sales, and it might even be able to buy out struggling competitors too. But that might take another few years.
The final element of the bull case is that the company's investment wing, SunStream Bancorp, puts it in a good position to benefit from the rapid growth of the global cannabis industry over the next decade and beyond. By lending to and investing in businesses in places like the U.S., where access to financing is still constrained by incomplete cannabis legalization, the company may well be able to generate significant income. And that would help move the bottom line closer to profitability, which probably would be favorable for the stock over the long term.
The bear thesis
The bear thesis against buying SNDL has a couple of arguments, starting with the company's mixed performance over the past few years.
Despite its liquor segment coming online, its net loss in the second quarter was CAD$72 million, 41% more than a year earlier. Plus, its quarterly gross profit margin has been negative the past three years, and so far it doesn't look like the Alcanna purchase is helping much. And it isn't as though management has articulated a plan for how it'll be working toward profitability, beyond a few vague references to streamlining its structure.
Furthermore, SNDL may be too diversified to be an effective competitor in any of its segments. Between alcohol, cannabis, and investments, management's time will be divided among operations in three very different industries, and it'll be difficult to master all three. This argument is quite persuasive, as so far in its history the business hasn't exactly demonstrated a strong competitive advantage in any field, never mind multiple fields.
Finally, there's the ultimate argument: There are safer stocks to invest in that can be expected to grow more (and more consistently). Other cannabis companies like Cresco Labs and Curaleaf have improved their gross profits much more than SNDL has over the last three years, and their shares have also performed significantly better, though they still underperformed the market. Given that they only need to focus on winning with cannabis, they might continue to do so -- and that's why it's probably best for most investors to buy shares of them instead of SNDL.