I am constantly getting questions on Sundial Growers (NASDAQ: SNDL). The stock has gone up to nearly $4 a share and now trading at $0.79. It was one of the “meme stocks” that took off early in the year. The most common question is, “Do you think Sundial will come back?”
The short answer is that I do think Sundial Growers stock is a risky buy and will climb up to $1.50 – $2.50 if there is another push by a social group like WallStreetBets and/or some movement on the legalization of marijuana. That being said, I do think it is a long shot and there are a lot better stocks to invest in. If you own the stock, I would hold on and sell it off at high.
This could be a textbook example of stock price volatility. In the present instance, it is the story of the stock of Sundial Growers (SNDL), a Canadian company, whose business is the manufacture and marketing of marijuana products for the use of adults. Its known products include the brands Top Leaf and Sundial Cannabis.
Sundial stock performance
At the start of this year, the stock was trading at $0.47. It started getting the attention of retail investors on the WallStreetBets forum of Reddit who, betting on federal legalization of the use of marijuana as well as aggressive growth plans announced by the company, pushed it to $3.96 a share.
However, as with most investor-frenzy driven rallies that are at least in part, speculative, it soon fizzled out, with a sustained period of correction leaving the stock at under 80 cents. At the same time, the company has been in the process of raising funds for its aggressive growth plans. These capitalization efforts have taken the number of outstanding shares from 200 million in July last year to 1.86 billion in May this year, more than a 9-fold increase. This dilution is seen as another reason for the tapering off of the price.
The average target price at which SNDL is pegged by analysts is $0.73, about 7 percent off the traded price at present. No ‘buy’ recommendations have come in from any analyst tracking the stock. The opinion is roughly divided between ‘Hold’ and ‘Sell,’ with ‘Hold’ being the more favored of the two. The target high seems to be $1.15 with the low being $0.40, a movement of a little under 50% on either side of the current price.
Analyst Shaan Mir of Canaccord Genuity has, in May, changed the earlier call of ‘Sell’ to a ‘Hold’ and even raised the target price from $0.65 to $0.70. His view is that the price pullback has brought it close to its implied valuation. Further, he believes that the company has huge cash reserves which could be deployed to generated additional returns not factored into the valuation.
What the future could hold
SNDL has evaluated its net asset value (NAV) at $0.61 per share, not so far off its traded price of $0.79. It relies on revenues from its branded cannabis products staying strong in order to deliver healthy margins and cash flows. The signals are encouraging. In Q1, branded cannabis products accounted for 74 percent of its revenues.
Is there a possibility that the stock price has bottomed out? Is it the right time for taking an exposure on SNDL? The following augur well for the stock:
- From $20.5 billion in 2020, the global cannabis market is on course to touch $90.4 billion in 2026
- Having pulled back 80 percent from its 52-week highs could be seen as an opportunity to enter at a discount
The present state of financials
For the first time ever, SNDL has reported a positive EBITDA of CAD 3.3 million is Q1 2021. It also managed to bring its sales and marketing and other administrative costs down by 35 percent to CAD 8 million in the same period. While in absolute terms these may not amount to much, could these be the harbingers of stronger performance in the ensuing quarters?
Sundial, in May this year, announced the acquisition of Spiritleaf Retail Cannabis Network and Inner Spirit Holdings for CAD 131 million. These acquisitions are expected to give a fillip to its top-line. With no debt on its books and cash and cash equivalents holdings amounting to CAD 873.5 million, Sundial does look to be in a good position for growth.
Sundial Growers Stock Pivots (NASDAQ: SNDL)