Subpar Balance Sheet, Poor Numbers Cloud Sundial Growers Stock’s Future

With the recent pullback in its share price, is now the time to reconsider taking a position in controversial cannabis company Sundial Growers (NASDAQ:SNDL)? After hitting a high of nearly $3.96 a share on Feb. 10, SNDL stock lost nearly two-thirds of its value.

Mature Marijuana Plant with Bud and Leaves. Texture of Marijuana Plants at Indoor Cannabis Farm.Source: Shutterstock

The run-up and subsequent drop in the share price has mirrored the broader cannabis sector. Leading stocks such as Tilray (NASDAQ:TLRY) and Canopy Growth (NASDAQ:CGC) also peaking on Feb. 10 and plummeting in recent weeks. The Global X Cannabis ETF (NASDAQ:POTX), which includes all three of the above names among its 26 pot-stock portfolio, is down 41.7% in that time.

Is the current slump a buying opportunity or will the weakness persist?

SNDL Stock In Redditors’ Sights

Much of the rally in cannabis stocks this year was driven by anticipation that more U.S. states would legalize the recreational drug, or at least legalize cannabis for medicinal use. The then-incoming administration of left-leaning Democratic President Joe Biden further fanned the flames of hope for looser regulations pertaining to cannabis.

However, the cannabis stock rally spiked in February when the r/WallStreetBets crowd on Reddit targeted stocks of companies such as Sundial, Tilray, Canopy and others. SNDL stock jumped 140% on Feb. 10, sending investors scrambling to buy shares.

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Sadly, though, the rally was short lived as investors quickly dumped SNDL stock. By Feb. 12, Sundial Growers share price had fallen 47%, leaving many people stuck with a substantial loss. By Feb. 23, Sundial Growers was down to $1.26 a share. The stock has slowly started to recover but is nowhere close to getting back to its 52-week high of $3.96 per share.

Fundamentals Have Not Changed

Aside from being caught up in an online pump and dump, not much has changed in terms of Sundial Growers fundamentals. The Canadian cannabis company continues to have a subpar balance sheet and poor financial results.

Specifically, Sundial’s net sales over the past three quarters have totaled 47 million CAD ($37.3 million), down 3.6% from the year earlier period. In that nine-month stretch, Sundial Growers posted a 175.8 million CAD loss. That loss was 39% greater that in 2019 . Not good.

The poor financials are a big reason why SNDL is currently a penny stock. The precarious financials are a risk to any investors who buy and hold shares of the company. While there has been speculation that Sundial Growers could be targeted for a takeover as the cannabis sector consolidates, no deals have yet to materialize.

Maturing Market

While the market for legal cannabis is maturing, it is still an industry that is less than five years old and remains largely confined to Canada, which is the only G7 leading industrialized nation to fully legalize the recreational drug. And Canada remains a comparatively small market at about one-tenth the size of the U.S.

And it was only recently that sales of legal cannabis surpassed black market sales. The continued strength of pot on the street has been a major reason why the legal market has struggled to take off in Canada.

In the U.S., only six states have fully legalized cannabis consumption. Many states are moving in the direction of legalization but still have a ways to go.

Avoid SNDL Stock For Now

Investors have many options to gain exposure to the growing and maturing cannabis sector – from stocks such as TLRY and CGC to exchange-traded funds, including POTX or the much larger ETFMG Alternative Harvest ETF (NYSE:MJ). There’s really no reason for investors to take a risk on a penny stock such as Sundial Growers.

When one considers the financial situation, future prospects and current size of the legal cannabis market, SNDL stock does not look that attractive. The five analysts offering 12-month price targets for Sundial Growers have a median price target of 40 cents on the stock. The high end of the target range is only 80 cents per share.

Until Sundial Growers expands, becomes profitable or gets acquired by a larger cannabis company, investors would be better off looking elsewhere. Sundial Growers stock is not a buy right now.

On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia. 

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