Nearly two years after its stock took a meme-driven trip to the moon and back in early 2021, SNDL (SNDL -4.31%) is starting to look like a serious contender. While its shares are down by more than 90% since late 2019, the former Canadian marijuana pure play now sells both cannabis and liquor. It also invests in marijuana companies, typically in the U.S.

What's more, management remains busy with spending and investing its war chest of $985.8 million Canadian dollars ($725 million) in cash and equivalents. It produced this by issuing new shares of stock while meme mania was at its peak. But does that make the stock a buy today, given its penchant for unprofitable growth via acquisitions? Let's investigate.

Will the Valens acquisition be transformational or more of the same?

The biggest question for SNDL, at the moment, is whether its latest strategic play will be a major advancement that puts it on the path to Canadian market dominance. On Aug. 22, SNDL said that it would be acquiring Valens Co., another vertically integrated Canadian cannabis business.

The deal is worth CA$138 million, paid for in SNDL stock. The new entity will reportedly be the largest cannabis company in Canada by revenue, topping powerful contenders like Tilray Brands. It will also lead to an estimated CA$10 million in annual cost reductions, which will help reduce the company's trailing-12-month (TTM) cash burn of CA$37.3 million.

Management hopes that the transaction will close in early 2023, after Valens' shareholders voted in favor of the combination. The impetus for the purchase is for SNDL to take advantage of the wave of consolidation in the cannabis industry, which has seen average selling prices per gram of marijuana decline, along with the valuations of cannabis stocks.

If SNDL succeeds in becoming the largest player in the Canadian market, it will be a big win for the scrappy company after a couple of hard years. In the long term, it could leverage its leading position to return lots of capital to shareholders, but that won't be anytime soon. 

There's no rush to buy 

The Valens acquisition won't solve SNDL's issues on its own. Neither company is profitable nor has either greatly improved gross margins during the past three years. Of more concern, Valens' quarterly revenue has dropped by more than 32% in the same period, reaching CA$20.3 million in Q3.

For reference, SNDL itself brought in CA$230.5 million in the same period. Shareholders can expect the new revenue from the acquisition to make the top line substantially larger either way. 

In the worst case, buying Valens could put SNDL further away from breaking even and cause it to burn cash at a substantially faster rate. This would eventually require painful production capacity-destroying cuts that would likely lead to a decline in revenue. It's unlikely that management would be interested in buying the smaller business if the risk of such an outcome was high, but it can't be ruled out.

In the typical scenario, a purchase like this would be a bolt-on boost to the top line in the near term. It would also have the credible potential for adding to profit in the long term as a few cost synergies are realized and the cannabis market shakes.

In the best case, the additional production and distribution scaling enabled by Valens' assets will make it easier to realize efficiencies that drive down costs, while also grabbing additional market share in the short term.

Significant further margin improvements could turn the company into a money maker as time passes and its control over the market solidifies into regional dominance or even monopolies. But there isn't much evidence in favor of that best-case outcome yet, and management hasn't given any indication that it expects such an outcome to happen.

Right now, the most likely outcome of the deal is the typical scenario outlined above. That implies there's plenty of time for more cautious investors to wait on the sidelines for confirming evidence of the acquisition's success before buying in.

Even if the worst-case scenario occurs, SNDL has CA$325.6 million in cash on hand, so it does have plenty of time to work out kinks. That isn't a compelling reason to buy the stock, though it does suggest that the risk of a wipeout is low.

That's exactly the problem with buying SNDL stock: There aren't many strong arguments for buying it instead of another equity, even if it's not as risky as it was in years past. Right now, there's no timetable for SNDL to reach profitability and return capital to shareholders. But without much in the way of organic top-line growth, it's hard to be enthusiastic about this stock. It's probably smart to wait a few quarters to see if its margins are trending in the right direction before thinking seriously about making a purchase.