Canadian cannabis stocks have underperformed the broader markets since early 2019. Most of these domestic marijuana producers were on an absolute roll just before Canada legalized pot for recreational use almost three years back. However, since then these companies have been impacted by tepid demand that can be attributed to the slower than expected rollout of retail stores in major Canadian provinces.
This in turn led to high inventory levels, massive write-downs, and negative profit margins. A thriving black market further exacerbated these issues and the emergence of COVID-19 impacted demand as well.
A Canadian cannabis stock that went public in 2019 which is also popular on social-media platform StockTwits is Sundial Growers. Sundial shares closed trading at $10.45 per share on August 2, 2019, and have since declined by a staggering 93% to currently trade at $0.78.
SNDL is one of the most followed companies on StockTwits with over 192,000 followers. While StockTwits might not be the best source of quality investment analysis it provides us with a proxy for retail investment trends for the particular company. Given the rapidly expanding cannabis market, SNDL stock might seem like the ultimate contrarian bet for investors, but it also carries significant risks.
As cannabis producers including Sundial are grappling with huge losses and cash burn, they have raised equity capital several times in the past resulting in shareholder dilution. Between September 2020 and February 2021, SNDL issued 1.15 billion shares taking the total share count to 2.06 billion at the time of writing.
Analysts expect Sundial to narrow its losses from $0.9 per share in 2020 to $0.09 per share in 2021. However, given its outstanding share count, it suggests the company will post over $18 million in losses on estimated sales of $53.8 million in 2020.
SNDL ended the June quarter with a balance of $885 million giving it enough liquidity to improve margins over time. However, if the company aims to gain traction via acquisitions, it will need to raise additional equity capital to maintain a debt-free balance sheet.
In the first six months of 2021, Sundial has issued 796.3 million common shares at an average price of $0.8597 allowing it to raise $855.2 million in the process.
In 2021, Sundial has looked to reduce its product portfolio and focus on high-margin items to improve its bottom line. The company’s business pivot is also making headlines after Sundial announced a partnership with SAF Group. This 50/50 strategic capital joint venture known as SunStream will focus on cannabis-related verticals in Canada and other international markets.
Here, SunStream will provide growth capital to companies in the cannabis sector and deploy capital strategically through direct and indirect investments.
In Q2, Sundial’s cannabis sales stood at $9.15 million which was significantly lower than its year-ago sales of $20.19 million. However, its cost of sales stood at $9.54 million indicating a negative gross margin. Alternatively, SNDL managed to generate $3.34 million in interest and fee revenue and $2.36 million in investment revenue, a business that did not exists last year.
In Q2, Sundial’s operating loss was $71 million which was significantly higher than the prior-year loss of $30.2 million.
SNDL stock is valued at a market cap of $1.6 billion which means its forward price to 2021 sales multiple is really steep at 30x making it a high-risk bet for investors.