In the last two years, Canadian cannabis stocks have trailed the broader markets by a significant margin. These “north of the border” pot stocks were impacted by lower-than-expected demand, resulting in oversupply, high inventory levels, low profit margins and billion-dollar write-downs. A thriving black market did not help either which exacerbated the sell-off.
However, in the past month, Canadian marijuana stocks have been rebounding. This is a result from many producers streamlining operations, reducing output and cutting losses to drive profit margins higher.
Since hitting its 52-week high of $3.96 in February, shares of Sundial Growers have taken a pounding, due to its weak fundamentals and massive losses. It continued to disappoint investors in Q1 after sales were down 32% year over year at $9.9 million.
However, during its earnings call, the company’s management explained it would be reducing its product portfolio and focus on high-margin products which will improve the bottom-line. In Q1, its gross margin was negative which is far from ideal for Sundial’s stakeholders.
Sundial is also looking to become a cannabis financier and it invested $100 million in other marijuana companies, generating close to $16 million in non-cannabis sales. This allowed the company to report a positive adjusted EBITDA in Q1.
Sundial has diluted substantial investor wealth as it continued to raise equity capital. Alternatively, it ended Q1 with a cash balance of almost $750 million and its balance-sheet is also debt-free. Sundial will use this liquidity for investment purposes as well as accretive acquisitions thereby allowing it to gain traction in a rapidly expanding market.
SNDL stock is valued at a market cap of $2.16 billion. Its sales are expected to decline by 3.4% to $48.7 million which shows the stock is trading at a very expensive price to sales multiple of 43.5x.
Neptune Wellness operates as an integrated health and wellness company. It has built a portfolio of lifestyle brands and consumer packaged goods products. It offers turnkey product development and supply chain solutions to businesses and government customers in multiple health and wellness verticals including cannabis and hemp, nutraceuticals as well as white label packaged goods.
In 2019, the company received a processing license from Health Canada allowing it to process and sell cannabis products. In the fiscal third quarter of 2021, Neptune’s sales were down 64% year over year at $3.33 million while it reported a negative gross profit of $8.91 million. Further, its adjusted EBITDA loss widened by 342% to $8.49 million in Q3 while its net loss stood at a mammoth $73.8 million or $0.59 per share. In the prior year period, the company reported a net income of $5.6 million or $0.06 per share.
In fiscal 2021, analysts expect Neptune’s sales to increase by 62.4% to $48 million and by 196% to $142.5 million in 2022. This means its trading at a forward price to 2022 sales multiple of less than 2x given its market cap of $278 million.
We can see that Sundial and Neptune are both grappling with high cost of sales and are focused on improving profitability. However, Neptune’s significantly lower valuation and high growth rates forecast in fiscal 2022 make it a better bet right now.
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SNDL shares were trading at $1.19 per share on Wednesday afternoon, up $0.03 (+2.59%). Year-to-date, SNDL has gained 151.32%, versus a 13.38% 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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