Even essentially the most seasoned buyers have been surprised in January, when merchants of the r/WallStreetBets subreddit orchestrated a brief squeeze that despatched shares of brick-and-mortar online game retailer GameStop (NYSE:GME) up over 1,000% in lower than a month (though its share worth has considerably decreased once more). Now, those self same merchants have turned their consideration to shares of Canadian marijuana producer Sundial Growers (NASDAQ:SNDL). Many new buyers have hopes that Sundial may very well be the inventory that helps them get wealthy fast.
Whereas GameStop buyers had genuine grievances for the inventory’s undervaluation, the identical would not essentially apply to Sundial. I believe that is one pot stock it is best to keep away from in any respect prices.
Why say no to Sundial?
Sundial ran out of its money proceeds in February 2020, simply two quarters after its IPO. In response, the corporate offered a ridiculous quantity of inventory for capital, far in extra of something it wanted to outlive. In August 2020, the pot grower’s excellent shares amounted to lower than 200 million. By Feb. 4, 2021, nonetheless, its share rely had grown to a surprising 1.56 billion.
Bullish buyers could level to the details that Sundial has gotten rid of its debt and has greater than CA$672 million in money and securities as causes for his or her enthusiasm. These are truthful factors, as rising marijuana firms usually want to lift a considerable amount of money earlier than investing in progress operations for a optimistic return.
The final half, nonetheless, is the place Sundial falls quick. Throughout third-quarter 2020, the corporate’s income declined by 36% 12 months over 12 months to CA$12.9 million. Concurrently, its gross margin fell by 323% from final 12 months’s quarter to unfavorable CA$17.29 million. Sundial needed to eliminate its Kamloops, British Columbia (BC) facility and droop operations in its Merritt, BC plant, citing an absence of shopper demand.
Certainly, its quarterly dried hashish offered fell by 23% in comparison with Q3 2019, whereas its merchandise’ internet promoting worth dropped by 37% to CA$2.21 per gram in the identical interval. The corporate additionally needed to write off CA$20 million in out of date stock and take CA$60 million in asset impairments. All issues thought of, its working loss amounted to CA$89.2 million in Q3 2020, or nearly seven instances its income.
Whereas the corporate bled shareholders’ money, administration took off with golden parachutes. The corporate paid its executives CA$3.12 million in share-based compensation through the quarter, accounting for practically 20% of its gross sales.
The irrational exuberance continues
Regardless of having a considerable amount of capital, Sundial would not have a observe file of turning it into stable income. Actually, fairly the other: Buyers want to see their stakes get smaller and smaller by way of spherical after spherical of dilutions and accelerating losses. Given its mind-boggling $3.05 billion market cap — and a price-to-sales (P/S) a number of of 48 — it’s clearly very overvalued. As a result of surge in curiosity on Reddit, the inventory greater than tripled in worth over the previous month.
Buyers ought to notice that whereas the inventory has made them very rich in a brief time frame, now will not be the time to carry on for expensive life in hopes of Sundial going to $5 or $10. As a substitute, take the income and get out whilst you nonetheless can. There are hashish firms out there rising their income by practically triple-digit percentages annually, that may flip a revenue, and but nonetheless commerce at cheaper valuations than Sundial. Selecting a kind of can be a a lot safer (and nonetheless thrilling) wager.