Stocks in the cannabis industry continue to remain volatile but also allow investors to derive market-beating gains due to a rapidly expanding market driven by expectations of marijuana legalization in the U.S.
Most Canadian marijuana producers are grappling with mounting losses, and lower than expected demand. These factors have led pot stocks to trail the broader markets by a significant margin. Now, cannabis companies are focused on streamlining operations, reducing cash burn, and shifting their product mix which should lead to a recovery in share prices.
Keeping this in mind, today we compare Sundial Growers (SNDL) with HEXO Inc (HEXO) to see which pot stock should be on your shopping list right now.
SNDL stock has skyrocketed in the past month
Shares of Sundial have gained momentum this week and are up 68% in the past month. This is likely because of a Redditt-fueled rally driven by retail traders on the social platform. Other meme stocks such as BlackBerry, GameStop, and AMC Entertainment have also exploded in the last few trading sessions. Despite the recent uptick, SNDL stock is down 70% from all-time highs, and for good reason.
In the first quarter of 2021, Sundial Growers saw its sales decline by 32% year over year to $9.9 million. Sundial said it will drastically reduce its product portfolio and focus on selling high-margin items which will improve its bottom-line.
It has also invested close to $100 million in other cannabis producers and derived $15.7 million via non-cannabis sales. This allowed the company to post a positive adjusted EBITDA in Q1 despite a negative gross margin. In case Sundial continues to focus on non-cannabis sales, it might become a marijuana financier rather than a licensed producer.
One of the things working for Sundial is its high cash balance of $746 million and debt-free balance sheet. It can use available liquidity to purchase companies that will be accretive to its revenue and profit margins. Sundial recently announced it’s looking to acquire Inner Spirit that has 19 stores and 67 franchise locations. In Q4 of 2020, Inner Spirit grew sales by 13.6% to $9.2 million and improved EBITDA margin by three percentage points to 19%.
However, Sundial is valued at a market cap of $2.4 billion indicating a forward price to sales multiple of an astonishing 54.6x. Comparatively, its revenue in 2021 is forecast to decline by 3.4% to $48.9 million.
HEXO stock is up 82% in 2021
Shares of HEXO have gained 82% year to date but are still trading 80% below its record high. HEXO stock gained momentum last week after it announced its intention to acquire Redecan for $925 million. HEXO will pay $400 million in cash and $525 million in stock to acquire Redecan which is the largest privately-owned licensed producer in Canada.
The Canadian pot giant has been on an acquisition spree this year. In February, HEXO announced it will acquire Zenabis Global in an all-stock deal valued at $235 million. Last month, HEXO disclosed it will acquire 48North Cannabis in an all-stock deal valued at $50 million.
HEXO explains Redecan will help it gain traction in the Canadian recreational pot market. Likewise, the Zenabis buyout will help it gain a foothold in Europe while massively increasing its production capacity. HEXO has forecast it might generate over $30 million in cost synergies via the acquisitions of Zenabis and 48North Cannabis.
Zenabis reported sales of $59 million in the last year and this figure for 48North Cannabis stands at $17 million. It suggests HEXO should easily generate over $300 million in annual sales once the above three acquisitions are closed, making it one of the largest cannabis companies in Canada. In fiscal 2020, HEXO reported sales of $81 million.
HEXO stock is valued at a market cap of $845 million which means its trading at a reasonable valuation. The company also reported positive adjusted EBITDA and 94% increase in net revenue from prior year in its latest earnings report. While the acquisitions will lead to increased costs in the near term, HEXO should benefit from synergies post-integrations.
HEXO and Sundial have consistently reported huge losses in the last few quarters and burnt massive amounts of cash. However, HEXO’s significantly lower valuation and latest acquisitions make it a better stock to bet on right now. I believe this is especially true if you account for Sundial’s Redditt-fueled rally which will likely come to an abrupt end soon.
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SNDL shares were trading at $1.19 per share on Friday morning, down $0.11 (-8.14%). Year-to-date, SNDL has gained 151.32%, versus a 13.23% 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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