Market Commentary: 32.1% Upside in Under-the-Radar Cannabis Stock
Investment Alert: Buy SNDL (SNDL) Under $1.40/share
Disclaimer: Investment Alerts have a medium to long-term time horizon. These do not constitute financial advice and you should contact a financial advisor before deciding whether it is appropriate for your individual circumstances.
SNDL Inc. (SNDL) is one of a handful of cannabis companies that was poised to take advantage of the 2018 legalization of recreational marijuana in Canada. But many companies have cropped up in the industry just over the past 5 years and the competition has made it increasingly difficult for SNDL to realize the growth that investors expected.
After the company’s August 2019 IPO, SNDL stock soared as high as $115. But fierce competition and decreased revenues have caused the stock to plunge almost 99% to where it currently trades just north of $1 per share. So far, 2023 has been particularly hard on Canadian cannabis companies and SNDL is no exception, with shares down nearly 40% year-to-date.
The number of cannabis companies in Canada has surpassed 1,000, and it continues to be easy for buyers to purchase cannabis on the black market. Heightened government regulations have also been an issue because it’s more expensive to package and distribute legal cannabis.
Another reason SNDL has struggled is the lack of opportunity for international expansion. Hopes that the US might expand legalization further are on hold for the moment, as any change in US cannabis law is likely to be years down the road. But SNDL has a healthy cash stockpile and revenue from liquor brands that could keep it afloat until other opportunities open up.
Perhaps most compelling of all now is its valuation that shows 32.1% upside to fair value at $1.85 per share.
Key Points
- SNDL is a Canadian cannabis producer that has struggled due to increased competition and difficult industry regulations.
- The company has been able to prosper due to aggressive acquisitions and continued revenue from its liquor retailers.
- Analysts believe the stock will uptrend in the next 12 months, with some predicting a 250% increase.
Growth Through Acquisition Has Created a Huge Firm
Sundial Growers quickly grew to become a corporate giant with 2,600 employees, and it changed its name to SNDL Inc in July 2022. With nearly 200 cannabis stores and 170 liquor stores across Canada, SNDL is the largest private sector cannabis and liquor retailer in the country.
SNDL has continued to grow by purchasing other brands. In January of 2023, it completed an acquisition of the Valens Company. The $138 million deal further strengthened the SNDL brand by leveraging Valens Company’s high-end manufacturing facilities.
But that was just the most recent acquisition. The purchases of Alcanna and Zenabis in 2022 gave a major lift to the company’s revenues. These acquisitions combined with a strong investment portfolio are a major reason why SNDL has been able to carve out a stronger position than many other Canadian cannabis companies. The company currently has a market capitalization of $325.3 million.
Diversified Revenue Streams Support Bull Thesis
SNDL owns farms and production facilities for growing and processing cannabis, but it also owns cannabis retail and liquor retail stores. The company does business in 4 segments: Cannabis Operations, Cannabis Retail, Liquor Retail, and Investments.
Cannabis Operations includes the farming, extraction, and distribution of cannabis for the medical and recreational markets. It consists of 11 different cannabis brands. This segment accounted for 9.5% of the company’s net revenues in the first quarter of 2023.
Cannabis Retail includes the Spiritleaf, Value Buds, and Superette brands that each have a specific niche in the cannabis market. This segment accounted for 33.3% of the company’s net revenues in the first quarter.
Liquor Retail includes Wine and Beyond, the largest chain of liquor retailers in Western Canada. It also includes the Ace Liquor Discounter and Liquor Depot brands, which operate a combined 150 liquor locations in Alberta. This segment was the most profitable in the first quarter, accounting for 57.3% of net revenue.
The Investments segment focuses on identifying and investing in emerging brands in the cannabis industry.
Financial Metrics Suggest Undervaluation
The company reported net revenue of $202.5 million in the first quarter of 2023, which represented an increase of 1,000% year-over-year from $17.6 million in the first quarter of 2022. This huge jump was largely attributed to the company’s recent acquisitions of Valens, Alcanna, and Zenabis.
Remarkably it represented around a 15% decline from net revenue of $240.4 million last quarter. SNDL attributed the decrease to slower alcohol sales due to seasonal trends. The company’s net loss of $36.1 million in the 1st quarter was down from $161.6 million in the first quarter of 2022, and also down from $38 million last quarter.
Despite the losses, it’s a major positive that the company has no debt on the balance sheet, and SNDL has $793 million in cash and securities to keep operations afloat. With a P/S value around 0.5, SNDL appears undervalued compared to its competitors.
What Analysts Forecast
In spite of the turmoil in the industry and the challenges that SNDL faces ahead, the majority of analysts still consider SNDL stock to be a buy at this price point. The highest buy rating forecasts the stock rising as high as $4.38 over the next 12 months, which would be a 200% plus increase over the current price.
Other analysts believe the stock will reach the low $3 range, which would still be around a 140% increase. The lowest forecasts still predict the stock will uptrend, just at a slower rate.
Our analysis suggests a more modest but still highly impressive increase of 32.1% based on a discounted cash flow forecast analysis.
Time to Buy?
SNDL is a Canadian cannabis producer that has struggled due to increased competition and difficult industry regulations. There aren’t many options for the cannabis market to open up any time soon, and that has caused many investors to sell and look elsewhere.
But SNDL has been able to stay afloat due to aggressive acquisitions and continued revenue from its liquor retailers. Because of the company’s diversification, cash on hand, and lack of debt, SNDL is still in a position to capitalize on it’s position as one of the largest brands in Canada.
