Sundial Growers: Looks to Expand but Misses Revenues and Profits

Sundial, in some form or another, keeps hitting my desk.  I did a brief video on the company just the other day but needed to put something on “paper” here on the site.  Sundial Growers $SNDL just finished a bought deal in a company that has caught my eye: Indiva $NDVAF.  Indiva is the best-selling edibles company in western Canada.  However, they are still gearing up so it is difficult to get a bead on their metrics.  Largely, I think Indiva is going to be a winner in a couple of quarters from now.

The deal was for $22M with an $11M lending facility and an additional $11M in a bought deal.  That solidified Indiva and I think that the company will move forward rapidly.

But, what about Sundial?  Many funding operationss have just occurred.  The company just raised several rounds of private offerings themselves with warrants of $89M priced at ~$1.00.  The warrants have an exercise of $1.50 with about 40 month’s timeframe.  They also just recently announced some $1B for a mixed-shelf offering; they will potentially raise an additional $1B.  That sounds very large and a bit diminishing for current investors.

Sundial has also been in a bit of hot water since $SNDL stock has traded below $1.00 for a period of time.  The stock has since pushed back upwards above that level and so the issue is resolved.

I am not in love with Sundial’s numbers and their future looks set to be about as bleak.  My experience has told me that bigger is not better.  The reason is simple: these bigger companies want to pave the world with inexpensive grow facilities and diminish the product quality.  We look no further than Canopy Growth $CGC, Tilray $TLRY, and especially Aurora Cannabis $ACB.

I am finding that companies that specialize in smaller niches have better performance numbers, whereas these bigger companies are all falling short.

Let’s break down the numbers so you can see what I’m referring to.

SNDL Chart

SNDL Chart

All of the cannabis stocks ran up big with the recent Reddit attack to valuations that made no real sense.  Now, the entire industry is set to reset their stock prices as a sell-off looks imminent.  It is my belief that $SNDL stock will trade below the $1.00 mark yet again and Sundial Growers will find themselves back in hot water with NASDAQ.  But, if Sundial raises its $1B and prices the offering above the $1.00 level, this could prevent this issue.

Sundial Revenues

Sundial Growers Revenue
While the rest of the cannabis industry grows rapidly, Sundial Growers has missed this opportunity to grow its revenues

Here is where I start to have a problem with Sundial Growers.  Growth rates in Canadian cannabis have been about 130% YoY.  But, Sundial Growers’ revenues have declined during that time.  This is the opportunity for Cannabis companies to be solidifying their customer base and expanding their revenues.  Yet, this is not happening with Sundial Growers.

Instead, with the recent bought deal offering with Indiva, the issuing of warrants of $89M, and the potential of raising the $1B, Sundial Growers is more focused on expanding versus growing.  This is a miss for me… and, it just goes downhill from there.

Sundial Growers Gross Margins

Sundial Growers Gross Margins
While ~400% gross margins sounds good to be true, there is truth to that

I don’t know many companies that would not want to print 395% gross margins.  Trust me, that is impressive if it were necessarily a metric that would be reliable; it is not.

Most of the best cannabis companies I analyze are printing between 60% – 65% in gross margins.  This would be more pragmatic.  A company produces a product for about $35.00 and sells it for $100.00 offering a gross margin of some $65.00, or 65% of the gross revenue.  The best companies that I am analyzing are topping out about 65%.  They set the bar that I compare all other companies to.

The 395% comes down to other factors that push the number as high as it does and these are one-offs.  Because of that, any analysis cannot rely upon this metric.

Sundial Growers Operating Efficiencies

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Sundial Growers’ operating efficiencies take away from any kind of positive number that is associated with the gross margins. What this metric tells me is that relative to total revenues, the total operating costs are very high; extremely high.  And, despite the fact that the misaligned margins are as high as they are, this will not over-compensate for this metric.

Basically, efficiencies are the total operating expenses over the total revenues.  Total operating expenses must be below total revenues in order for a company to ultimately become profitable.

Ultimately, based on what Sundial is producing and selling, they are also simultaneously sitting on very large facilities with high costs.  I think I saw somewhere that the company has some 485k square feet of grow facility; a very large facility.  That costs money.

Most would suggest that with a large capital raise potential they could eventually grow into this.  But, as a cannabis stock investor, I’m interested in profits right now not a cannabis company that is being drained of cash along the way.

Sundial Growers Net Income

Sundial Growers Net Income
Sundial Growers has not improved its profit position much in the past 1.5 years

Despite the gross margins, this is the real story for Sundial.  Its focus is on expanding its operations instead of a product development focus that will ensure profits.

If Sundial were to have been building up a strong customer base and increasing its revenue base this would be excusable.  But, they are not.  They are instead focusing on becoming big through acquisition.  We have already seen this go poorly with Canopy Growth, Aurora Cannabis, and Tilray and those companies are far from impressive.  They are just big for the sake of being big.

Conclusion

One thing to keep in mind about what I am doing is going through all 350 cannabis stocks and seeing which companies are good buys and which are busts.  I am comparing very large data inputs from all of the various companies.  By comparing these companies to one another I get a very good perspective of which company is the leader and which is a loser.

Is Sundial Growers a buy?  I would not touch this company simply because I cannot trust their metrics nor am I interested in a company that is losing as much money as they are.  There are a few excellent companies out there.  Sundial is not one of them.

Sundials’ main focus is on being large and I think they are missing the opportunity to expand into a solid customer base.  They appear to have no solid foundation with customers when you look at revenues alone.

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