SNDL (SNDL -2.00%) wants to be a top growth stock and the company has been making moves to bolster its financials, mainly through acquisitions. However, investors have remained hesitant to buy the cannabis stock, as it has failed to perform better than others in the industry this year. Will 2023 be another challenging year for SNDL, or could this once-popular meme stock be a hot buy again?
Manufactured sales growth hasn't been impressing investors
If SNDL were to generate $1 billion in revenue next year, it would be an impressive feat for the business. But at the same time, investors would know that if that happens, it means the company has been even more aggressive in pursuing mergers and acquisitions.
That's because SNDL hasn't been generating anything notable in the way of organic growth this year. Instead, it has turned to acquisitions to bolster its top line. The most significant deal it has closed on in the past couple of years is its purchase of alcohol retailer Alcanna back in March. Liquor retail now makes up the majority of SNDL's business, with sales last quarter (period ending Sept. 30) totaling 230.5 million Canadian dollars, with the new segment representing two-thirds of that figure.
But as the stock's returns this year show (SNDL is down 57%), this manufactured sales growth simply hasn't been all that convincing. Mergers and acquisitions are nothing new to cannabis investors, and that strategy isn't going to be enough to make a stock a good buy. If SNDL's stock is going to rally in 2023, it needs to offer investors much more than just sales growth.
Profitability and cash are likely the burning issues for investors
A big concern I have with SNDL's business is that it is highly dilutive and the company issues many warrants, so much so that a change in the value of its warrants oftentimes has a significant impact on its financial statements. Last quarter, a change in the estimate for the fair value of its derivative warrants resulted in an expense totaling CA$8.5 million. A year earlier, it was a gain of CA$24.1 million.
In order for SNDL to win over investors, it will need to show that its growth is sustainable and that the business is bringing in positive cash flow to avoid having to rely on warrants and issuing shares in the future. In the trailing 12 months, the company's cash burn from operations has totaled CA$29.9 million and its net losses were CA$269.7 million.
While the company believes it can generate free cash flow, investors are better off seeing that before believing it, as management admits that its "transformation is far from complete."
Will SNDL stock do better next year?
It can be tempting to think after falling more than 50% that there's no way SNDL could do worse in 2023. But SNDL investors need to only look as far as rival Aurora Cannabis, which now has a lower market cap than SNDL, as proof that things can always get worse, especially in the volatile and unpredictable cannabis industry.
The risk for investors is that SNDL may continue to be aggressive with acquiring other businesses because that could lead to more share issues and dilution. While I would be surprised if SNDL falls another 50-plus percent next year, I certainly wouldn't rule out the possibility. But even if 2023 is a better year for the stock, that doesn't mean it'll be a good buy as SNDL's tailspin may be far from over.
