Headquartered in Calgary, Canada, Sundial Growers Inc. (SNDL) manufactures and distributes cannabis and derivative products for medical and recreational purposes. 

The stock is popular among meme investors and has been mentioned in many posts on the Reddit forum r/wallstreetbets over the past seven days. However, approximately 60% of the comments were negative, indicating a bearish sentiment. SNDL slumped 32% over the past six months and 5% over the past five days.

Here’s what could shape SNDL’s performance in the near term:

Acquisition

SNDL is currently exploring a potential acquisition of Alcanna Inc., the largest liquor retailer in Canada. Alcanna also has 74 retail cannabis stores in three provinces in Canada. If approved, this acquisition should expand SNDL’s national footprint significantly. Alcanna’s Board of Directors has encouraged investors to vote for this acquisition in the special meeting scheduled on January 7, 2022. Leading independent proxy advisory firms ISS and Glass Lewis also recommend Alcanna shareholders to vote for this merger.

SNDL is expected to acquire Alcanna for approximately $346 million. Given its negative trailing-12-month net operating and levered free cash flows, this acquisition might adversely affect its operations in the short term.

In addition, SNDL expects this acquisition to contribute $15 million in additional EBITDA annually. However, its trailing-12-month EBITDA loss stands at $50.04 million. Thus, Alcanna acquisition synergy alone is not sufficient for SNDL to improve its negative profit margins.

Intense Competition

Legal cannabis sales have skyrocketed since Marijuana legalization in Canada in 2018. In fact, legalized cannabis sales in Ontario crossed the illicit market sales for the first time in the fiscal third quarter of 2021. Retail cannabis sales in Canada increased 35.7% year-over-year in October last year. Desjardins Capital Markets Analyst John Chu expects the U.S. and cannabis industry to grow at a 10% CAGR in 2022. New store openings in Canada are expected to increase at a 12% rate this year.

However, SNDL is a relatively small player in the Canadian cannabis industry, with a $1.21 billion market cap. It does not come in the top 10 biggest Canadian marijuana companies list. In addition, SNDL’s negative profit margins and cash flows might limit its growth trajectory in the highly competitive industry.

Frothy Valuation

In terms of forward Price/Sales, SNDL is currently trading at 29x, 310.9% higher than the industry average of 7.06x. The stock’s forward EV/Sales multiple of 14.98 is 159.1% higher than the industry average of 5.78. Also, its forward EV/EBITDA ratio of 45.38 is 180.5% higher than the industry average of 16.18.

Furthermore, SNDL’s forward P/E multiple is negative.

POWR Ratings Reflect Bleak Prospects

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

SNDL has a grade of F for Stability and Momentum and a D for Quality. The stock’s relatively high 5.65 beta is in sync with the Stability grade. In addition, it is currently trading below its 50-day and 200-day moving averages of $0.65 and $0.80, respectively, indicating a downtrend. This justifies the Momentum grade. Furthermore, SNDL’s negative net income margin and ROE account for the Quality grade.

Of the 189 stocks in the F-rated Medical – Pharmaceuticals industry, SNDL is ranked #187.

In addition to the grades I’ve highlighted, view SNDL ratings for Growth, Sentiment, and Value here.

Bottom Line

SNDL’s weak financials and profit margins are expected to restrict its growth trajectory in the highly competitive industry. Moreover, the stock’s stretched valuation, and high beta makes it susceptible to immense pullbacks during times of market volatility. As analysts predict a sharp market correction in the upcoming months, given the macroeconomic uncertainty and deepening healthcare crisis, SNDL is best avoided now.

SNDL shares were trading at $0.62 per share on Monday afternoon, up $0.04 (+7.19%). Year-to-date, SNDL has gained 30.94%, versus a 29.20% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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