Sundial Stock Could Come Under Pressure After Fourth-Quarter Earnings

Stocks to sell

Canadian marijuana group Sundial Growers (NASDAQ:SNDL) has recently been in the limelight. SNDL stock, which started 2021 around 50 cents, saw a 52-week high of $3.96 on Feb. 11. Let’s delve into the weeds and take a closer look at the company. 

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Currently, shares are hovering around $1.60.

By comparison, the ETFMG Alternative Harvest ETF (NYSEARCA:MJ), a marijuana-themed exchange-traded fund (ETF), is up roughly 70% year-to-date.

Investors in cannabis businesses like SNDL stock have been enjoying strong returns since early November 2020. 

Hopes for federal legalization of cannabis stateside under President Joe Biden have been the major catalyst for the sector. Many cannabis stocks like Sundial have also been on fire over the past couple of weeks due to the bullish bets of traders on the Reddit platform.

In the coming weeks, profit taking in SNDL stock is likely, as global equity markets may once again become more risk-averse. Therefore, if you currently have paper profits, you might consider taking some money off the table. Let’s take a closer look.

The Recent Earnings Report

On March 17, the Calgary-based Sundial Growers reported mixed fourth quarter and full-year results. Gross revenue increased by 10% to 73.3 million CAD in 2020. Q4 net cannabis revenue came at 13.9 million CAD, an increase of 8% sequentially. Q4 net loss was 64.1 million CAD, an improvement from previous years.

In the past year, Sundial Growers has been working to transition from wholesale to branded retail sales with mixed success. For example, in 2020, the average gross selling price per gram equivalent of branded products was 5.05 CAD per gram. But a year ago, it had been 6.24 CAD per gram.

CEO Zach George cited, “We entered our second year of commercial operations facing a number of internal and external challenges, including operational difficulties, excessive leverage, inadequate cost control, a lack of focus on our core value proposition, and rapidly evolving industry conditions … while our financial strength has improved materially, we still have significant work to do in our core operations.” 

Like most other cannabis companies, SNDL is not profitable. Furthermore, it does not have a clear road map to achieve profitability. Despite various cost-cutting measures, it is still burning cash at levels that raise eyebrows. Therefore, it is likely that in the coming quarters Sundial might need to offer stock to raise cash, which cannot bode well for the share price.

The Bottom Line On SNDL Stock

Like most of its cannabis peers, Sundial Growers made little progress in 2020 toward achieving a positive bottom line. While management is moving away from a wholesale to a branded retail business model, there are considerable headwinds ahead. 

The Canadian market is simply not large enough to make it profitable for most marijuana firms. Unless U.S. federal legalization occurs, Sundial and its peers cannot increase revenues. And yet, the Street is always looking ahead. I believe most of the potentially positive news regarding legalization has already been factored into SNDL stock.

Therefore, in the coming weeks, I do not expect much increase in the price of SNDL stock. If you are sitting on paper profits, you might consider ringing the cash register to realize at least some of your gains.

Those investors interested in the cannabis space but do not want to commit capital into a single company might also consider investing in marijuana ETFs. In addition to MJ, other funds include the AdvisorShares Pure Cannabis (NYSEARCA:YOLO), the Amplify Seymour Cannabis (NYSEARCA:CNBS), and The Cannabis ETF (NYSEARCA:THCX).

On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.