Cannabis stocks have been volatile this year. Not dissimilar to most nascent industries, stocks prices in the cannabis space have experienced big spikes and sharp declines over the years. Several marijuana producers are still unprofitable and are burning cash at a rapid clip. This means they must regularly raise equity capital, which dilutes shareholder value.
However, investors are nevertheless bullish on the expanding pot market in North America and the prospect of pot legalization in the U.S. and several other regions. This potential makes the sector attractive to investors with large risk appetites.
Sundial Growers stock is down 94% from record highs
Sundial Growers is a Canada-based company that produces and markets cannabis products for adult-use markets. It produces and distributes cannabis flowers, pre-rolls, and vapes. Sundial offers products under multiple brands, including Top leaf, Sundial Cannabis, Grasslands, and Palmetto.
Sundial Growers went public in August 2019 and its stock hit a record high of CAD11.5 that month. It is now trading at CAD0.83 per share, 94% less than its record high.
One of the major reasons for Sundial’s poor performance is the staggering dilution of its shareholder equity. In July 2020, Sundial had just over 100 million shares outstanding. This rose to 1.66 billion at the end of Q1 of 2021.
Sundial has more than CAD700 million in debt on its balance sheet. The company is also losing market share in Canada. At the close of 2020, Sundial had 2.7% market share in Canada, which is a decline from its 3.5% market share in the prior-year period.
Sundial harvested close to 28,000 kgs of dried cannabis in 2020. Given its average selling price per gram of CAD$4.14 in the December quarter, the company had around CAD116.8 million of total inventory. But its total gross sales of CAD74 million in the last year indicates that Sundial sold just 60% of its cannabis produce in 2020 as a result of lower-than-expected demand.
Sundial Growers’ stock is valued at a market cap of CAD1.37 billion, which means it’s trading at a 24.6x forward price to sales multiple, which is extremely steep for a company that’s forecast to grow its top line by just 11% this year.
Is OrganiGram stock a better bet?
OGI is also a Canada-based pot stock that has underperformed the market in the last two years. OGI stock is currently trading 70% below its record high despite 88% gains in 2021.
In its fiscal second quarter of 2021, OrganiGram reported gross sales of CAD19.2 million, representing a 29% decline year over year. Its net sales were down 37% at CAD14.6 million. Bay Street analysts forecast OGI’s Q2 sales at CAD19.6 million.
Further, OrganiGram reported a CAD$66.4 net loss, much wider than its prior-year net loss of CAD6.8 million. Its adjusted EBITDA loss in fiscal Q2 stood at CAD8.6 million in Q2 compared to an EBITDA loss of CAD59,000 in the last year.
OrganiGram attributed its less than impressive results to challenging industry dynamics amid COVID-19 as well as staffing limitations at its facility.
Its sales were down in Q2 due to lower wholesale revenue and lower selling prices. The falling prices of dried cannabis for OrganiGram and Sundial points to intense competition among marijuana companies in Canada, which has impacted their bottom-line negatively.
Looking ahead, OGI’s management said the company is on track to generate higher sales in Q3 based on an expansion of its product portfolio and an improvement in consumer demand.
OrganiGram stock is valued at a market cap of CAD918 million, which means it has a 12.7x forward price to sales multiple. While analysts expect its sales to decline close to 17% to CAD72 million in fiscal 2021, they are forecast to rise by 58% to CAD114 million in 2022.
The final takeaway
We can see that both Sundial Growers and OrganiGram are unprofitable pot stocks that are under the gun. Both companies are high-risk bets given their widening losses and tepid revenue growth. However, OrganiGram looks like a better bet given its significantly lower valuation and accelerating revenue growth numbers for fiscal 2022.
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SNDL shares were trading at $0.79 per share on Tuesday morning, down $0.04 (-4.40%). Year-to-date, SNDL has gained 66.84%, versus a 11.16% 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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