Consolidation is inevitable in the cannabis industry, where many companies are struggling to grow and turn a profit. SNDL (SNDL -3.62%) has made acquisitions a key part of its strategy in recent years. By doing so, it has been able to transform its business from being just a marijuana grower to both a pot and alcohol retailer. And it has already begun 2023 with a new acquisition that should boost its sales yet again, but is it enough to make the stock a buy?
SNDL acquires Valens
On Jan. 17, SNDL announced it completed the acquisition of cannabis extraction company Valens. SNDL says that the move "creates a low-cost vertically integrated Canadian company generating over a billion dollars in annualized pro forma revenue." That's a sizable leap for a cannabis company that in 2021 reported just 56 million Canadian dollars in sales for an entire year.
The total cost of the deal was CA$138 million, and it was funded primarily through shares. SNDL says it has CA$262.5 million in net cash on its books, which isn't a whole lot of money to fund big purchases, but it has been relying heavily on shares to acquire businesses, so even if its cash balance declines, that may not necessarily mean the company is going to stop wheeling and dealing.
Sales growth hasn't been enough to get investors bullish on the stock
SNDL's claim of producing CA$1 billion in pro forma revenue is promising, but this is all manufactured revenue growth. The company isn't achieving this because it is generating organic growth and finding ways to expand by adding value. Instead, it's stacking more businesses on top and adding to their collective results.
For the period ending Sept. 30, 2022, its net revenue of CA$230.5 million was up an incredible 1,501% year over year. But investors weren't rushing to buy the stock because all that growth was largely due to acquisitions. It completed its acquisition of liquor retailer Alcanna in March 2022, and SNDL's new liquor retail segment generated CA$152.5 million and was responsible for much of the increase in revenue. Alcanna also owns a majority stake in pot retailer Nova Cannabis, which SNDL noted was also key to the strong results last quarter.
Getting to CA$1 billion would be an accomplishment for SNDL, but if it achieves that without improving its struggling bottom line, it may not end up attracting investors. Over the trailing 12 months, SNDL has incurred a net loss of CA$269.7 million -- that's 55% of its revenue.
Should you invest in SNDL?
Last year, SNDL's shares plummeted 64%, while the S&P 500 fell by a more modest 19%. The stock is near its 52-week low and the concern for investors should be that if there is more consolidation, that could inevitably lead to more dilution and a lower share price.
SNDL hasn't settled its business down to focus on reducing costs and eliminating redundancies from its acquisitions. Until that happens and investors get a better picture of what its margins look like and what its prospects are for profitability, it'll be difficult to assess just how well the company is doing because its financials are constantly changing due to all these acquisitions.
Even with the drop in price, SNDL isn't a stock I would risk putting in my portfolio, as there are much better options out there to invest in. The Valens deal may boost the company's revenue modestly (Valens' revenue is normally around CA$20 million per quarter) and help create some opportunities, but the bigger issue investors are worried about these days is profitability, and SNDL still has too much to do on that front before becoming a tenable investment.
