Sundial Growers (NASDAQ:SNDL) inventory was set ablaze final week thanks to a different r/WallStreetBets buying and selling frenzy.
As shares like AMC Leisure (NYSE:AMC) and GameStop (NYSE:GME) cooled off after final month’s parabolic rally, Redditors quickly turned their consideration to pot shares. This curiosity stems from the mass legalization of marijuana sweeping throughout the nation.
Following a point out on r/WallStreetBets on Feb. 10, SNDL inventory was in for a roller-coaster experience final week. Shares of the corporate were up 79% earlier than settling down by 19% on Thursday. Whereas the rally did lead to some short-term good points for buyers who timed their bets effectively, SNDL remains to be basically not a sound funding.
Right here’s why.
A Nearer Look At SNDL Inventory
Fueled by optimism from the Reddit neighborhood, SNDL inventory skilled an enormous rally In its value final week. The hashish inventory was is up greater than 320% for the reason that begin of 2021.
Whereas this value enhance positively provides to its attract, in actuality, the basics of the enterprise are nonetheless significantly weak. For one, the SNDL inventory is grossly overvalued at its present value. With income of simply $37 million, the corporate has a market cap of $3.1 billion (post-rally). This places this inventory at a steep valuation, whatever the market setting.
On a barely brighter be aware, the latest rally allowed Sundial Growers to boost a stream of money. The corporate used the rise in its share value as a chance to alternate shares for money. As of February, Sundial reported outstanding shares of 1.56 billion and a money stability of $610 million. It will allow it to pay down in debt of $72 million in complete.
For an organization that was near chapter final 12 months, the power to boost this a lot money over a number of months is, certainly not, a small feat.
Nevertheless it’s additionally value taking a look at it from a special angle. Whereas the money will assist alleviate Sundial’s monetary woes within the quick time period, the corporate continues to lose giant quantities of money. This largely stems from poor administration of stock that the corporate claims it’s actively working to resolve.
Previously 12 months, Sundial burned through CA$113 million from its operations. Whereas its present money stability will help maintain this burn fee, the hashish firm nonetheless must have a greater maintain on its prices for long-term profitability.
Potential Lengthy-Time period Tailwinds
An enormous money stability in its pocket additionally signifies that Sundial Growers has the chance to restructure its enterprise. And it seems like all of the arrows are pointing to only this. A latest instance of that is Zenabis International (OTCMKTS:ZBISF). After Sundial made an preliminary funding within the firm to buy its debt, Zenabis later claimed this was the corporate’s attempt at a forced acquisition.
Whereas this acquisition didn’t go in Sundial’s favor, there may be nonetheless probability it can add to its present operations within the close to future. Throughout its IPO, the corporate acknowledged that it could use the money raised for acquisitions and investments.
However whereas this does look like a optimistic catalyst for the corporate, it’s all nonetheless rumour at this level. What Sundial does with its wholesome money stability is but to be seen.
If it is ready to make the most of the money to develop its footprint within the hashish business, it can add considerably to its backside line. A liquidity place of $610 million actually offers the corporate a protracted runway for progress however buyers might want to maintain out until the subsequent earnings report back to gauge these tailwinds.
The Backside Line
The latest rally actually gave SNDL inventory an enormous enhance however the firm nonetheless has rather a lot to show. Particularly, as regards to operational enhancements and income ranges that may justify its market cap.
With no clear path to profitability proper now, buyers will nonetheless want to attend and see the place this inventory is headed. Its upcoming earnings report may also present extra clues as to what Sundial plans to do with its giant money stability.
I’m not saying the corporate is a nasty funding. It simply has rather a lot to show. Traders who consider in comeback tales may probably discover this inventory to be simply that.
Nevertheless, for those who’re extra averse to threat, I might positively maintain off on taking the plunge and see how issues play out within the coming weeks and months.
On the date of publication, Divya Premkumar didn’t have (both immediately or not directly) any positions in any of the securities talked about on this article.
Divya Premkumar has a finance diploma from the College of Houston, Texas. She is a monetary author and analyst who has written tales on varied monetary subjects from investing to non-public finance. Divya has been writing for InvestorPlace since 2020.