Should You Invest in the Rebranded SNDL?

  • Sundial Growers is now SNDL. The cannabis company adopted the new name in honor of its stock, which has become super popular among retail investors.
  • SNDL’s cannabis and liquor businesses are doing well after the acquisition of Alcanna, which was finalized this year.
  • After going through a severe stock dilution that culminated in a reverse stock split, SNDL’s share price has already suffered too much and valuations currently look attractive.

Figure 1: Should You Invest in the Rebranded SNDL?

SNDL

(Read more from the Wall Street Memes: BBBY Stock: Why More Short Squeezes Are Still Possible)

Why Did Sundial Growers Rebrand Itself?

Sundial Growers is now SNDL Inc.  (SNDL) – Get Sundial Growers Inc. Report. The decision to rebrand the cannabis company came about due to the influence of retail investors.

According to CEO Zachary George, the stock ticker SNDL eventually became the company’s brand.

However, the rebranding also symbolizes a change in direction for SNDL’s core business. Two years ago, the company’s main focus was on its indoor cultivation facilities.

With the expansion of its business into other areas such as liquor and other investments in the cannabis market, the company is no longer restricted to being simply a cannabis cultivator.

SNDL’s Cannabis Business

Over the years, SNDL has become a major player in the Canadian cannabis market. However, the company has suffered from challenges in the industry, such as cannabis price compression, soaring inflation, and increased competition. This has made it difficult for SNDL and other companies in the sector to turn a profit.

However, SNDL has been making investments in the quality of its products over the years. Under CEO Zachary George, the quality of its crop has increased dramatically.

In the last quarter alone (Q2), the company’s cannabis segment generated $63.5 million in revenue, versus a meager $7.5 million in the previous quarter (Q1).

This increase was due to SNDL’s acquisition of Value Buds cannabis retail stores — which it received through its $255.55 purchase of Alvanna.

However, the company’s cannabis cultivation and production segments, combined with retail, are not profitable. Last quarter, SNDL reported a pre-tax earnings loss of $7.7 million.

SNDL’s Liquor Business

Thanks to its acquisition of Alcanna, SNDL has become the largest liquor retailer in Canada, with about 170 stores.

SNDL’s liquor business didn’t exist until last year. However, it has already become the company’s most profitable segment. If this trend continues, SNDL’s primary focus will likely shift to liquor sales.

Last quarter, SNDL’s liquor business generated $148.6 million in revenue, with gross margins of $33.5 million. Interestingly, the segment generated earnings before taxes of $7.24 million, realizing a profit, as opposed to the loss-making cannabis segment.

SNDL says that it will continue with its plans to optimize its liquor segment’s profitability and cash flow through a focus on cost discipline.

SNDL’s Clean Balance Sheet

In the cannabis industry, it’s common to see companies with balance sheets full of debt. Until a few years ago, SNDL was one of them.

Today, even with a portfolio of half-a-billion dollars in investments, the company has zero debt and a balance sheet of about $230 million.

How did SNDL get such a clean balance sheet? The answer: retail investors.

Last year, SNDL became a meme stock, and its share price skyrocketed in a matter of weeks. It reached a point where more than a million individual accounts at brokers like Robinhood  (HOOD) – Get Robinhood Markets Inc. Report owned SNDL shares.

SNDL took the initiative to raise cash by issuing equity. The company aggressively diluted its shares from 105 million in 2020 to more than 2 billion in 2021.

The measure was unpopular with retail investors, because the company’s share price was reduced to a penny stock. However, the money raised from the stock dilution was key to acquisitions such as that of Alcanna.

The Bottom Line

Finally, valuations.

SNDL has a price-to-sales ratio of 2.8, versus an industry average of 2.1 and 2.5 for the S&P 500. Generally, this is good, because it indicates that investors are more willing to pay a high premium for the company’s revenue than for the revenue of the industry or the market as a whole.

SNDL also has a price-to-book (P/B) ratio of 0.6, compared to 1.8 for the industry. A low P/B ratio could mean that the stock is undervalued, because the stock’s price is trading at a lower price to the value of the company’s assets.

Recently, SNDL underwent a reverse stock split due to its inability to trade above $1 per share for 10 consecutive trading sessions — a Nasdaq requirement.

Since the dilution of SNDL’s float, the stock has been unable to provide good returns to its investors. However, I believe that the company’s share price seems de-risked enough after picking up strongly since last year.

Therefore, I see SNDL as one of the most interesting cannabis stocks to invest in. The company has been enjoying its excellent balance sheet and is making good use of the money raised from its stock dilution by making key investments in profitable businesses beyond cannabis.

Although the market is in a delicate situation and has suffered in recent years, the legal cannabis market is expected to expand at a compound annual growth rate (CAGR) of 25.3% until 2030. And in the long term, SNDL is shaping up to be a relevant player.

(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting Wall Street Memes)

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