Canada-based Sundial Growers Inc. (SNDL - Get Rating) produces and markets cannabis products for the adult-use market. Its stock has gained 76.6% over the past year, benefiting from a growing domestic and international cannabis market and from optimism surrounding the potential legalization of marijuana in the United States at federal level.

However, the stock has lost 15% over the past month. And the company’s underwhelming quarterly results do not bode well for its stock price in the near term.

Although SNDL has gained some popularity due to the recent Reddit frenzy, unless and until there is more certainty over a large-scale legalization of cannabis in the United States, the company may continue to face difficulties increasing its revenues.

Here’s what we think could influence SNDL’s performance in the near term:

Weak Growth Prospects

While the recreational use of marijuana was legalized in Canada in 2018, the Canadian market is still too small for cannabis companies to grow their bottom lines significantly. It could take a considerable period  before Canada’s marijuana market is sufficiently developed to cater  its  large potential consumer pool. Unless  less federal decriminalization or legalization occurs in the U.S. , Canada-based cannabis operators like SNDL will have great difficulty  increasing their revenues  in the crowded cannabis space.

Unimpressive Quarterly Performance

Even though SNDL’s net revenue increased 8% sequentially to C$13.9 million in the fourth quarter, ended December 31, the company reported a net loss from continuing operations of C$64.1 million and an adjusted ebitda of negative C$5.6 million over the period. Furthermore, SNDL’s sales, marketing and general and administrative expenses increased 6% to $8.8 million in the fourth quarter of 2020 from $8.3 million in  the prior quarter.

Unfavorable Analyst Estimates

Analysts expect SNDL’s revenue to decline 52.9% in the current quarter and 21.2% in the quarter ending June 30. Also,  the stock failed to beat the Street’s earnings estimates in any of the trailing four quarters.

Lower Profitability

SNDL’s trailing-12-month negative gross profit margin of 81.9% is significantly lower than the industry average. Also, the company’s negative ebitda margin and levered free cash flow margin compare poorly with positive industry averages.

POWR Ratings Reflect Bleak Prospects

SNDL has an overall F rating, which equates to Strong Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. Among these categories, SNDL has a grade of C for Momentum, which is consistent with its price decrease over the month.

It has an F  grade for Sentiment, given analysts’ pessimism about its earnings and revenue growth.

In addition, SNDL has a D grade for Quality. This is justified given the company’s lower-than-industry profitability ratios.

In addition to the grades we’ve  highlighted, one  can check out SNDL’s POWR Ratings for Value, Stability, and Growth here.

If you’re looking for better stocks in the Medical – Pharmaceuticals industry with an Overall POWR Rating of A or B, you can access them here.

Bottom Line

Like most of its industry peers, SNDL’s impressive price performance over the past year shows that it has also capitalized on the optimism around  the potential large-scale legalization of cannabis in the United States. However, the company has been struggling to stay afloat financially. So, we think it’s wise to avoid the stock now.

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SNDL shares were trading at $1.13 per share on Thursday morning, down $0.00 (0.00%). Year-to-date, SNDL has gained 138.65%, versus a 7.09% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

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