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Why You Should Avoid Sundial Growers Stock Like the Plague
This mid-cap pot grower has more than quadrupled investors' money in the past six months, but it could very well light their gains up in flames.
Zhiyuan Sun
(TMFZhiyuanSun)
Feb 20, 2021 at 6:33AM
Author Bio
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
Even the most seasoned investors were stunned in January, when traders of the r/WallStreetBets subreddit orchestrated a short squeeze that sent shares of brick-and-mortar video game retailer GameStop (NYSE:GME) up over 1,000% in less than a month (although its share price has significantly decreased again). Now, those same traders have turned their attention to shares of Canadian marijuana producer Sundial Growers (NASDAQ:SNDL). Many new investors have hopes that Sundial could be the stock that helps them get rich quick.
While GameStop investors had genuine grievances for the stock's undervaluation, the same doesn't necessarily apply to Sundial. I think this is one pot stock you should avoid at all costs.
White woman sits at a desk, writing with a pen on a notepad, with a laptop in the foreground in front of her.
IMAGE SOURCE: GETTY IMAGES
Why say no to Sundial?
Sundial ran out of its cash proceeds in February 2020, just two quarters after its IPO. In response, the company sold a ridiculous amount of stock for capital, far in excess of anything it needed to survive. In August 2020, the pot grower's outstanding shares amounted to less than 200 million. By Feb. 4, 2021, however, its share count had grown to a stunning 1.56 billion.
Bullish investors may point to the facts that Sundial has gotten rid of its debt and has more than CA$672 million in cash and securities as reasons for their enthusiasm. Those are fair points, as emerging marijuana companies often need to raise a large amount of cash before investing in growth operations for a positive return.
The last part, however, is where Sundial falls short. During third-quarter 2020, the company's revenue declined by 36% year over year to CA$12.9 million. Simultaneously, its gross margin fell by 323% from last year's quarter to negative CA$17.29 million. Sundial had to dispose of its Kamloops, British Columbia (BC) facility and suspend operations in its Merritt, BC plant, citing a lack of consumer demand.
Indeed, its quarterly dried cannabis sold fell by 23% compared to Q3 2019, while its products' net selling price dropped by 37% to CA$2.21 per gram in the same period. The company also had to write off CA$20 million in obsolete inventory and take CA$60 million in asset impairments. All things considered, its operating loss amounted to CA$89.2 million in Q3 2020, or almost seven times its revenue.
While the company bled shareholders' cash, management took off with golden parachutes. The company paid its executives CA$3.12 million in share-based compensation during the quarter, accounting for nearly 20% of its sales.
The irrational exuberance continues
Despite having a large amount of capital, Sundial doesn't have a track record of turning it into solid profits. In fact, quite the opposite: Investors would like to see their stakes get smaller and smaller via round after round of dilutions and accelerating losses. Given its mind-boggling $3.05 billion market cap -- and a price-to-sales (P/S) multiple of 48 -- it is clearly very overvalued. Due to the surge in interest on Reddit, the stock more than tripled in value over the past month.
Investors should realize that while the stock has made them very wealthy in a short period of time, now is not the time to hold on for dear life in hopes of Sundial going to $5 or $10. Instead, take the profits and get out while you still can. There are cannabis companies out there growing their revenue by nearly triple-digit percentages each year, that can turn a profit, and yet still trade at cheaper valuations than Sundial. Picking one of those would be a much safer (and still exciting) bet
Recent SNDL News
- KCSA Cannabis Virtual Investor Conference Presentations Now Available for Online Viewing • GlobeNewswire Inc. • 06/06/2024 12:35:00 PM
- KSCA Cannabis Virtual Investor Conference Agenda Announced for June 5th • GlobeNewswire Inc. • 05/31/2024 12:43:44 PM
- SNDL to Present at the KCSA Cannabis Virtual Investor Conference June 5th • GlobeNewswire Inc. • 05/31/2024 12:35:00 PM
- Form 6-K - Report of foreign issuer [Rules 13a-16 and 15d-16] • Edgar (US Regulatory) • 05/09/2024 03:15:53 PM
- Form 6-K - Report of foreign issuer [Rules 13a-16 and 15d-16] • Edgar (US Regulatory) • 05/09/2024 03:13:44 PM
- U.S. Index Futures Dip, Bank of England Holds Interest Rates at 5.25% • IH Market News • 05/09/2024 11:47:20 AM
- SNDL Reports First Quarter 2024 Financial and Operational Results • PR Newswire (US) • 05/09/2024 10:00:00 AM
- SNDL Reports First Quarter 2024 Financial and Operational Results • PR Newswire (Canada) • 05/09/2024 10:00:00 AM
- SNDL and Nova Cannabis Complete the Assignment of Dutch Love Stores to Nova Cannabis • PR Newswire (Canada) • 05/09/2024 09:30:00 AM
- SNDL and Nova Cannabis Complete the Assignment of Dutch Love Stores to Nova Cannabis • PR Newswire (US) • 05/09/2024 09:30:00 AM
- SunStream USA Poised to Acquire Cannabis Assets • PR Newswire (Canada) • 05/02/2024 11:00:00 AM
- SunStream USA Poised to Acquire Cannabis Assets • PR Newswire (US) • 05/02/2024 11:00:00 AM
- Cannabis Stocks On The Move Amid DEA Reclassification Indication • AllPennyStocks.com • 04/30/2024 08:59:00 PM
- SNDL to Announce First Quarter 2024 Financial Results on May 9, 2024 • PR Newswire (Canada) • 04/26/2024 11:00:00 AM
- SNDL to Announce First Quarter 2024 Financial Results on May 9, 2024 • PR Newswire (US) • 04/26/2024 11:00:00 AM
- SNDL to Participate in Upcoming International Cannabis Conferences • PR Newswire (US) • 04/09/2024 11:00:00 AM
- SNDL to Participate in Upcoming International Cannabis Conferences • PR Newswire (Canada) • 04/09/2024 11:00:00 AM
- SNDL and Nova Cannabis Announce Assignment of Dutch Love Stores to Nova Cannabis and Extension of Credit Facility • PR Newswire (Canada) • 04/01/2024 11:29:00 PM
- SNDL and Nova Cannabis Announce Assignment of Dutch Love Stores to Nova Cannabis and Extension of Credit Facility • PR Newswire (Canada) • 04/01/2024 11:29:00 PM
- SNDL and Nova Cannabis Announce Assignment of Dutch Love Stores to Nova Cannabis and Extension of Credit Facility • PR Newswire (US) • 04/01/2024 11:29:00 PM
- U.S. Index Futures Rise as Fed’s Dovish Outlook Spurs Positive Investor Sentiment; Oil Prices See Minor Declines • IH Market News • 03/21/2024 11:26:38 AM
- SNDL Reports Full Year and Fourth Quarter 2023 Financial and Operational Results • PR Newswire (Canada) • 03/21/2024 09:58:00 AM
- SNDL Reports Full Year and Fourth Quarter 2023 Financial and Operational Results • PR Newswire (US) • 03/21/2024 09:58:00 AM
- Form 6-K - Report of foreign issuer [Rules 13a-16 and 15d-16] • Edgar (US Regulatory) • 03/01/2024 04:48:56 PM
- SNDL to Announce Year End and Fourth Quarter 2023 Financial Results on March 21, 2024 • PR Newswire (Canada) • 03/01/2024 12:00:00 PM
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