I’m as bullish as any cannabis stock investor. However, Sundial Growers (NASDAQ:SNDL) stock investors are making one of the riskiest possible bets in a very risky space.
Back in May 2020, I cautioned cannabis investors about buying Aurora Cannabis (NASDAQ:ACB). At the time, the company was a complete financial mess. I dubbed Aurora the “king of cannabis stock dilution.” Roughly a year later, SNDL has definitely taken over that title. To make matters worse, Sundial’s steep valuation suggests top-tier growth numbers. In reality, Sundial’s growth numbers are headed in the wrong direction.
I see a lot of parallels between SNDL stock today and ACB stock a year ago. A year ago, I called Aurora more of a cannabis “lottery ticket” than an investment. ACB stock is down 45% since that story was published. Today, Sundial may be the new cannabis lottery ticket.
The SNDL Stock Numbers
First, let’s take a look at Sundial’s most recent quarterly numbers. In the fourth quarter of 2020, Sundial reported C$13.9 million in revenue, down 49% from the previous year. For the full year of 2020, Sundial’s revenue was down 20%.
Sundial reported a net loss of C$63.7 million in Q4 and a net loss of C$239.7 million for the full year. The 2020 net loss was an improvement from its C$271.5 million net loss in 2019. But a loss is a loss.
The losses are palatable for cannabis investors. After all, the cannabis industry is theoretically in the very early stages of a potentially massive long-term global growth phase. However, growth is the problem for Sundial. The reason Sundial’s revenue is shrinking is because the company is selling assets and shutting down production while other companies are growing. Sundial sold its Kamloops, British Columbia, property for $2.1 million in March 2020. It also shut down production in its Merritt, BC, facility, citing lack of consumer demand.
The one thing cannabis stock investors should be able to hang their hat on is growth. The steep valuations, the cash burn and the regulatory risk can all be forgiven if the growth is there. SNDL stock is a growth stock missing its growth.
Management Flooding The Market With SNDL Stock
A year ago, I thought Aurora was the king of cannabis stock dilution. From mid-2014 through the end of 2020, Aurora’s outstanding share count exploded from 1.35 million shares to 184.2 million shares.
The past year has certainly changed my opinion. In the past 12 months, Aurora’s outstanding share count is up 71.8% as the company continues to dilute its shareholders to raise the cash it needs to support its business. But SNDL stock is in a league of its own when it comes to dilution. In the past year, Sundial’s outstanding share count is up 1,490%. Another way of looking at that insane number is that someone who owned 10% of the company a year ago would now own 0.6% of the company.
Now, one can argue that shareholder dilution is just an unfortunate part of the cannabis stock game at this point. Growth requires investment, and investment requires funding. But Aurora’s 71% dilution is fairly extreme in its own right. To me, 1,490% dilution in a single year has only two explanations. The first explanation is that the company is on the brink of disaster. It is throwing its shareholders under the bus in a last ditch effort to avoid bankruptcy. The other possible explanation is that management doesn’t care about shareholders at all. It prints new shares of stock like they’re going out of style to raise money without paying a second thought to its investors. Either way, that’s not the type of stock I want to be a major part of my portfolio.
Despite all of the red flags I mentioned above about Sundial’s negative growth and its insane dilution, the stock is up 119.6% year-to-date. At one point in February, the stock was up more than 450% year-to-date.
Cantor Fitzgerald analyst Pablo Zuanic has a “neutral” rating for SNDL stock. His commentary on the stock is extraordinarily honest by Wall Street standards. In his most recent note on Sundial, he noted SNDL stock traded (at the time) at 29 times projected 2022 sales.
“Ongoing retail speculation plus the potential for SNDL to make strategic and accretive acquisitions (given the strengthened [balance sheet]), makes the short case risky, in our opinion,” Zuanic says.
In other words, he’s saying not to short SNDL stock even though it has a high valuation. There is simply too much “retail speculation.” On Wall Street, “retail speculation” is code for unsophisticated market gamblers.
Most Wall Street analysts would never admit to this fact, but Zuanic says his $1.40 price target for SNDL stock is largely based on the price action in the stock rather than any fundamental analysis.
“Yes, this is a case where the [price target] chases the stock given our Neutral stance,” he says.
Sundial could have tremendous long-term upside. I see the biggest upside coming from a potential buyout by a bigger company with a more competent management team.
As I said before, I’m extremely bullish on cannabis as a whole. I personally prefer Canopy Growth (NASDAQ:CGC) as my top cannabis stock. But I have been consistently recommending cannabis investors select a basket of at least four or five leading Canadian legal producers and U.S. multi-state operators to diversify their exposure.
If you’re willing to stomach the volatility and risk, SNDL stock has huge long-term upside. But at this point, Sundial is more of a lottery ticket than a sound cannabis investment.
On the date of publication, Wayne Duggan held a long position in CGC.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book Beating Wall Street With Common Sense, which focuses on investing psychology and practical strategies to outperform the stock market.
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