As Sundial Growers stock scrambles to make compliance, investors have been wondering if the cannabis company is a good investment. The global stock market has been extremely volatile as geopolitical unrest, rising oil prices, and inflation has investors spooked. The U.S. stock market has been in a downturn, heavily affected Canadian cannabis stock Sundial Growers. You might remember Sundial as a meme stock, but its business has saw dramatic changes since its 2019 IPO.
In February 2021, the stock surged 220% in 20 days to US$2.08 when reddit traders assembled to leverage short-selling. Thirteen months later, the stock is struggling to maintain a US$1 trading price. And the market downturn isn’t helping. $SNDL stock fell 23% since its 2022 peak of US$0.66 as investors exited higher risk assets.
Sundial Growers Stock Faces Risk of Delisting
Sundial managed to escape the Nasdaq delisting twice in two years. It has to trade above $1 for 10 consecutive trading days to avoid delisting. The company failed to meet its Nasdaq compliance deadline on February 7th, however they have recieved a 180-day extension.
Sundial Growers went public in 2019 when cannabis stocks were red hot. This presented them with the opportunity to raise capital, and today it now has 2.06 billion outstanding shares. One good thing this dilution did was give it a cash reserve of $629 million at the end of September 2021. Sundial used some of the capital to pay off its debt liabilities.
Coming back to the most pressing question, can Sundial Growers stock price grow 100% to reach the US$1 mark? And can the stock sustain these levels? Let’s find out!
Can Sundial Stock Grow to US$1 in 2022?
In November 2021, the company announced a $100 million share buyback program, representing 5% of its outstanding shares. That is not sufficient to reach the $1 target. Moreover, a buyback shows that the company doesn’t have enough growth opportunities to re-invest in the business.
So, what is the next option for Sundial Growers stock? The management has confirmed that it might do a reverse stock split if needed. If there is a five-for-one split with each share costing $0.5, the company issues you a new share worth $1.25 in exchange for five, thereby pushing up the stock price. As a result, this highlights the company’s failed growth plan, and the price may not be sustainable.
While the management could bring that share price to US$1, using the above techniques, they can’t sustain the price level unless backed by fundamentals.
Can Sundial Growers Sustain the US$1 Mark?
Since 2021, Sundial has been undergoing a turnaround by adding new revenue streams other than growing cannabis. It expanded into retail and investment operations. Retail operations have wholly-owned and franchise retail cannabis stores for recreational cannabis. It has ventured into the investing business, wherein it invests capital into other cannabis companies. Surprisingly, the investment business helped Sundial report its first profit in the third quarter.
Sundial has to maintain this profit momentum to attract more investors and grow to a sustainable stock price. However, the company’s large amount of shares outstanding may continue to attract short sellers. The stock is currently trading at 20 times sales, which is expensive for a company whose cannabis revenue growth was just 12% in the third quarter.
All hopes are now on the acquisition of Canada’s largest private liquor retailer Alcanna. The acquisition would open a more sustainable revenue stream of selling liquor. Alcanna is a profit-making company with a 63% stake in one of Canada’s largest cannabis retail chains Nova Cannabis. Sundial is also hopeful that the United States might legalize cannabis at the federal level this year.
Analysts expect Sundial Growers to increase revenue to $705 million in 2022 and up to $1.1 billion in 2024.
Sundial Growers Stock: Investor Dilemma
With the company’s ongoing restructuring plans, this might help revive its business. The retail operation might bring stable revenue, and investment operations might bring in higher profits. And with no long term debt on the balance sheet, it has time to grow.
But the company’s irresponsible handling of shareholders’ interest (equity dilution, share buyback, reverse stock split) makes investors cautious about the stock. Buying back stocks only to maintain Nasdaq listing doesn’t hint that the management won’t continue to dilute share through equity offerings.
Moreover, in the current market of rising inflation, investors are reluctant to take higher risks. Sundial Growers has high risk but also high return potential. It is not a good stock to buy for risk-averse investors. But even if you are willing to take risks, don’t get your expectations too high for a growing business with poor shareholder interest.
Disclosure: The author holds no position in Sundial Growers Inc. Freedom Stocks has a disclosure policy.
