The Canadian cannabis market is in rough shape. Thanks to a surfeit of licensed cultivators (greater than 1,000 presently and growing), onerous packaging requirements, a thriving black market, a limited international market, heavy excise taxes, vast oversupply, and stubbornly high prices in the medical marijuana segment, Canada's fledgling cannabis industry is undergoing a wave of forced mergers and bankruptcies right now.
To survive this hypercompetitive landscape, some of the country's largest cultivators have decided to diversify their revenue streams to include alcohol, ornamental flowers, vegetables, and even venture capital investing activities. Nonetheless, these efforts have largely failed to halt the steady decline in cannabis company valuations in the country. To wit: Canada's largest publicly traded cannabis operators have all lost a significant amount of value since the start of 2023:
SNDL Market Cap data by YCharts
There are a few reasons to think a trend reversal might be close at hand, however. For instance, the Canadian government has finally started to admit that its fragmented approach to regulation hasn't been helpful to the nascent industry. Reform, albeit slow, appears to be on the way.
Image source: Getty Images.
Additionally, there is growing optimism in Washington, D.C., that cannabis banking reform could be passed this year. And a federal review of marijuana's Schedule I status in the U.S. is also expected to be completed by year-end, possibly opening the door for some type of nationwide regulatory framework on cannabis sales perhaps as soon as 2024.
Is it time for growth investors to start bottom fishing Canada's top cannabis cultivators like Alberta-based SNDL (SNDL 3.08%)?
SNDL: A company in transition
Like nearly every Canadian cannabis outfit, SNDL is losing money right now. In its most recent quarter, SNDL reported a net loss of 36.1 million Canadian dollars. And despite being Canada's largest private sector cannabis retailer, SNDL generated a meager CA$67.4 million in retail sales during the first quarter of the year. To put this figure into context, Canadians spent approximately CA$1.13 billion per quarter, on average, on adult-use marijuana product sales in 2022, according to Statistics Canada.
Cannabis has also dramatically shrunk in importance for the company from a financial performance standpoint over the past year. After the acquisition of Alcanna in 2022, for instance, the company's liquor sales now comprise roughly half of SNDL's quarterly revenue. That's good and bad news for shareholders. Liquor sales are a fairly dependable revenue stream, but intense competition will likely hamper growth over the long term.
There is also little to no synergy between SNDL's liquor and cannabis segments. Consequently, SNDL may eventually decide to spin off its liquor business into a standalone unit once the cannabis market becomes a viable growth opportunity. Put more succinctly, SNDL's liquor segment may not factor into the company's long term growth trajectory. Time will tell.
On a positive note, SNDL is extremely well capitalized, despite its inability to turn a profit. SNDL exited the first quarter of 2023 with CA$793 million in cash and cash equivalents, and zero debt. So, in a worst-case scenario where global marijuana reform fails to materialize during the current decade, the company should have the financial resources necessary to play the long game.
Is SNDL a contrarian buy?
While there are reasons for optimism, SNDL doesn't screen as a top growth stock right now. The key reason is that the global cannabis industry is in a state of flux right now. And there's no way to predict when the industry might hit an inflection point from a regulatory standpoint. Meanwhile, SNDL, along with most of its Canadian peers, will likely have to continue to spend precious capital on secondary opportunities like alcohol simply to survive the lean years in legal marijuana.
