Spotlight: 99% Lower, Time To Buy This Weed Stock?

Cannabis company SNDL, formerly known as Sundial Growers, has fallen more than 99 percent from its record closing high of $130. Now trading at less than $1.50 per share, the stock has been one of the biggest losers of the last few years. Its massive contraction in value, however, has left many investors wondering whether it has become oversold. Does the stock’s ultra-low price make it a buy?

Key Points

• Analysts expect revenue growth of nearly 40% this year.
• The cannabis market is highly volatile and competition is strong.
• Even with an appealing book value and an interesting opportunity in liquor sales, SNDL does not look like a good buy at this time.

Canadian Cannabis Leader

SNDL is a Canadian company involved in the production and sale of cannabis products. In addition to its cannabis business, SNDL is also a liquor and vape retailer.

Despite its heavy exposure to the cannabis market, SNDL’s liquor business is also an extremely important component of the company’s operations.

SNDL operates 170 liquor stores in Canada and is currently the country’s largest private-sector liquor seller.

In Q1, SNDL reported $202.5 million in total revenue. This represented a gain of over 1,000% from Q1 of 2022 when sales totaled just $17.6 million. Liquor sales represented by far the largest revenue segment, accounting for $115.9 million.

One of SNDL’s most major challenges is the fact that it remains deeply unprofitable. In the last fiscal year, the company lost over $257 million. Its net margin over the same time period was -36.8 percent, while its return on equity was -6.6 percent. As of the most recent reporting period, SNDL held $189.8 million in unrestricted cash. Given the company’s rapid losses, SNDL’s relatively low cash holdings raise concerns for investors.

It should be noted, however, that SNDL has not resorted to debt financing to cover its losses, as the company’s debt-to-equity ratio is just 0.10. When marketable securities and other investments are taken into account, SNDL’s reserve also rises to a much more respectable $793 million.

Even with revenues rising, SNDL has not been able to appreciably increase its earnings. In Q1, the company’s reported net loss was $36.1 million, compared with $38 million a year earlier. Given the enormous increase in revenue during the same time, it does not appear that SNDL has made appreciable progress toward sustainable profitability.

The brightest spot for SNDL is its revenue growth opportunity. Analysts expect revenues to grow by nearly 40 percent this year, opening up the possibility of better times ahead. Much of this growth could be driven by the liquor retail segment, as SNDL plans to expand its chain of liquor stores beyond its current base in Alberta. As of Q1, the company had secured the necessary licenses to expand this part of its business into Saskatchewan.

As of the time of this writing, only one analyst has offered a price forecast for SNDL. That target price is $3.31, nearly 140 percent above the most recent price of $1.41. Given the massive losses SNDL has incurred, however, investors would be wise to treat this price target with extreme skepticism.

Examining SNDL’s value, however, the picture becomes far more interesting. With a book value of $5.26 per share and no substantial long-term debts, SNDL appears to be trading well below its liquidation value.

While this fact clearly demonstrates the stock’s perceived risks among investors, it may make SNDL interesting to some highly risk-tolerant value investors.

SNDL’s largest risk factor is its continued trend of steep losses. While the company flirted with profitability for brief periods in both 2020 and 2021, it has never proven that it is capable of delivering stable, steady profits. With losses remaining flat even as revenues have spiked over the past year, investors cannot see a clear path to positive earnings in the immediate future.

Investors should also consider the logistical difficulties that face SNDL as a young company attempting to expand and succeed in two entirely different businesses. While related, cannabis and liquor represent different markets and each presents its own unique business challenges. By trying to pursue both at the same time, SNDL runs the risk of losing focus and not making the most of either business.

It’s also important to take into account the general state of cannabis stocks when considering SNDL. Following a huge crash among US-based cannabis stocks late in 2022, the market remains highly volatile. Although SNDL operates in Canada, its shares fell sharply alongside the rest of the market.

Competition is also extremely strong among cannabis companies jockeying for market share, making it difficult to determine which companies will ultimately emerge as the winners. This low-certainty, high-volatility environment presents large risks for investors. Even at a tiny fraction of its former price, SNDL still has the potential to produce further losses.

While SNDL’s revenues are undeniably improving, the company’s stock has continued to plummet due to lack of profitability and concerns about the cannabis industry in general. With the stock sold off to less than 1 percent of its previous price and trading at just above a fifth of the company’s book value, SNDL appears to be a rare value on paper. To truly be a good investment, however, the company will have to demonstrate that it is on a solid path toward eventual profitability.

Interestingly, the best bull argument for SNDL may have more to do with its liquor business than its cannabis business. As the main revenue source for the company, liquor sales could represent the best path forward for SNDL. To some degree, the company is leaning into this path. As more liquor stores open outside Alberta, SNDL may see its revenues increase and its profitability improve.

Even with an appealing book value and an interesting opportunity in liquor sales, however, SNDL does not look like a good buy at this time. The company’s lack of focus on a single business model, streak of losses and lack of a durable competitive moat in the cannabis market all combine to make it an extremely high-risk investment. SNDL may well be a value trap, and investors who are interested in the company will likely be better to wait for real signs of long-term fundamental improvements before risking money on a stock that has already cost past investors the vast majority of their capital.