SNDL Stock: How Has Sundial Growers Diluted Shareholder Wealth?
May 07 2021 - 6:59AM
Finscreener.org
The stock prices of companies part of the
cannabis space continue to remain volatile in 2021. Canadian
stocks listed on the NYSE and other U.S. exchanges have burnt
massive investor wealth in the last two years.
Investors were optimistic about the legalization of cannabis
north of the border. However, Canadian marijuana producers are now
grappling with lower-than-expected demand, a thriving black market,
high inventory levels, and widening losses.
Pot investors believe the near-term headwinds to disappear in
the upcoming quarters as the world returns to normalcy as well as
liberal regulations regarding cannabis consumption in major
markets, especially in the developed world.
Massive growth forecast for the marijuana
sector
While tech stocks have driven broader markets to record highs in
the last few years, the upcoming decade could be the time for pot
stocks to shine. In the U.S., over 70% of the states have legalized
medical marijuana products while recreational and medical marijuana
is legal in 16 states. The Democrats are likely to decriminalize or
even legalize cannabis at the federal level in the U.S. which
should drive pot stocks to record highs.
A research report from New Frontier Data forecasts cannabis
sales in the U.S. to grow at an annual rate of 21% between 2019 and
2025 to reach $41.5 billion by the end of the forecast period.
Comparatively, Canada’s pot market is expected to grow from $2.6
billion in 2020 to $6.4 billion in 2026.
There is a good chance for Mexico to legalize marijuana which
suggests the North American cannabis market will generate close to
$50 billion in annual sales each year by 2025. Does this make
unprofitable marijuana producers like Sundial Growers (NASDAQ:
SNDL)
a good buy right now?
SNDL stock is down 95% from record highs
Shares of Sundial Growers went public in August 2019 and touched
a record high of $11.5 that month. Currently, the stock is trading
at $0.70 per share which means it has lost 95% in market value in
less than two years.
One of the major reasons for Sundial’s underperformance can be
attributed to the staggering dilution in shareholder wealth. In
order to lower debt, Sundial issued 1.15 billion shares in just
five months (between September 2020 and February 2021).
In 2020, the company reported a loss per share of $0.88 per
share. Now, Wall Street expects Sundial Growers to narrow its
losses to $0.01 per share in 2021 and 2022. While this improvement
in the bottom line might seem attractive, investors should note
that Sundial has 1.66 billion shares outstanding. So, it will still
post a net loss of over $16 million this year compared
to sales of $55 million in 2021.
Sundial had a cash balance of $570 million as of March 15, 2021,
which it used to eliminate the outstanding debt on its balance
sheet. The recent equity capital raise provides Sundial with the
flexibility to execute on multiple growth initiatives going
forward. However, it also filed a prospectus recently where Sundial
stated the company could raise another $800 million in equity
capital, suggesting investors might have to brace for another round
of dilution.
Based on its current price of $0.70, Sundial might issue 1.1
billion new shares in the near term.
High valuation for Sundial Growers
Sundial Growers is valued at a market cap of $1.17 billion. It
indicates the stock is trading at a forward price to sales multiple
of 21.2x which is extremely steep. Further, Sundial is losing
market share in the Canadian cannabis market. In Q4 of 2020, the
company accounted for 2.7% of the Canadian marijuana market
compared to a market share of 3.5% in Q4 of 2019. Its net sales
were also down 4.2% year over year in 2020 at CA$60.9 million.
In 2020, Sundial harvested 27,927 kg of dried cannabis compared
to 34,012 kg of cannabis it harvested in 2019. If we consider the
company’s average selling price of $6.01 per gram it suggests
Sundial should have reported close to CA$116 million in gross
revenue if it managed to sell 100% of its produce.
However, Sundial’s gross revenue was just CA$73.3 million in
2020 which shows the company sold 60% of its harvested produce
increasing its inventory levels in the process.
The final takeaway
Sundial Growers seems like a high-risk investment given its
falling market share, negative profit margins, and the potential to
dilute shareholder wealth in the future.
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