Canadian cannabis stocks have underperformed the S&P 500 significantly in 2021. That’s because these stocks carry significant risks, given that a majority of them are grappling with massive losses with a high cash burn rate.
Canada legalized marijuana at the federal level back in October 2018 but demand remained subdued due to the slow rollout of retail stores in major provinces. The COVID-19 pandemic exacerbated these issues which meant pot stocks have grossly underperformed the broader markets since the start of 2019.
However, as the demand environment normalizes and companies improve their cost structures, it might be time to look at this beaten-down sector once again. Here, we compare two Canadian cannabis companies, Sundial Growers (SNDL) and Flora Growth (FLGC), to see which is a better investment right now.
Sundial has diluted shareholder wealth at an alarming rate
Sundial Growers went public in the second half of 2019 and the stock has since lost 90% in market value. Despite an expanding addressable market, Sundial sales have fallen from $75.8 million in 2019 to $60.9 million in 2020. Analysts expect sales to decline to $56 million this year.
Alternatively, the company’s operating loss widened from $59.5 million in 2019 to $97.27 million last year. It also had close to $200 million in total debt and a cash balance of just $45 million at the end of 2019. In order to offset its substantial cash burn and high-interest expense, Sundial raised equity capital multiple times after its IPO.
Its outstanding share count stands at more than two billion, compared to 105 million at the end of Q2 of 2020. While the company is debt-free and has $986 million in cash, its revenue decline remains a concern.
Sundial is in fact looking to pivot its business by reducing its product portfolio and gain traction in the cannabis financing segment. It announced a series of investments in 2021 that includes $22 million (debt and equity) with Indiva Limited, a cannabis edibles manufacturer. Sundial created a joint venture with SAF Group, a private equity player, and as of July 2021, it has contributed over $400 million to the venture.
The company’s interest and investment income in Q2 stood at $9.4 million which was higher than its net revenue of $9.2 million.
Flora Growth is a recent IPO
A small-cap cannabis stock, Flora Growth trades at a market cap of $360 million. The company recently went public and has already gained close to 80% in market value. Analysts expect its sales to rise from $14 million in 2021 to $39.56 million in 2022. Flora is also forecast to improve its bottom line from a loss per share of $0.08 to earnings of $0.03 per share in this period.
Flora Growth’s stock gained momentum on the back of a letter of intent the company signed with Avaria for a partnership. The joint venture will sell Avaria’s CBD cream KLaya known for its pain-relieving properties. The product is already popular in Canada and Flora will sell it via the company’s distribution network in Latin America.
Flora Growth also disclosed plans to cultivate and distribute cannabis products from Columbia lowering its costs significantly. The costs of cultivating medical cannabis in Columbia are lower than $0.05 per gram compared to the average costs of $0.75 per gram in the U.S.
Columbia also benefits from tropical weather which will help Flora Growth improve overall yield capacity. Additionally, Flora Growth has signed a distribution deal with a major Columbia food distributor which will help it generate $10 million in sales each year while providing it access to 130,000 distribution points in 38 cities in the country.
The final takeaway
I believe that FLGC is a better buy now. We can see that SNDL’s business pivot, falling revenue, and poor financials make it a high-risk bet compared to FLGC, which is racing towards profitability. SNDL’s financing business needs to increase investment and interest revenue at an accelerated pace for investors to regain confidence in the company.
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SNDL shares were unchanged in after-hours trading Friday. Year-to-date, SNDL has gained 64.73%, versus a 21.98% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditya Raghunath
Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist. More...
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