Is the Recent Sundial Growers Decline A Microcosm of the Industry?

Is the Recent Sundial Growers Decline A Microcosm of the Industry?

Inflation fears based largely on rising interest rates have created some chaos in the stock market this week. Amid the general turmoil in the market, shares of Sundial Growers ( NASDAQ: SNDL) slipped nearly 9 percent early in the week, against a basket of stocks in the Standard & Poors 500, which only fell 3.9 percent.

At least three Wall Street analysts who offered one-year guidance on Sundial Growers over the last quarter give the stock an average price target of $0.60. This would be the relative mean between a $0.48 low forecast and a high of $0.80. Effectively, the average price target represents an incredible 99.93 percent increase from the previous price of $0.30.

Sundial Faces Two Major Challenges

With investors somewhat perpetually perturbed by a macroeconomic situation teetering on deterioration, Sundial Growers (NASDAQ: SNDL) continues to struggle. At a time when investors are largely uncertain about the status of the market, as a whole, Sundial faces two basic challenges.

First of all, they are a cannabis stock. Although these companies are popular right now, not all investors are putting their financial support behind them. Indeed, this is a category that the market has looked poorly on for at least the past year. And even though public favor is high—in retail markets where cannabis is legal—the honeymoon period could be over.

Secondly, Sundial Growers is unprofitable. Of course, this is somewhat common across this particular industry, but that doesn't make the stock any more attractive to investors. And that is never more true than during such turbulent times as these. And, again, even as these products are growing in popularity, they may not be the most secure investments.

Leveraging Stock for Capital Isn't Working Anymore

Like so many other companies, especially the past few years, Sundial Growers has raised cash by issuing several hundred million dollars of stock. In fact, they relied heavily on this strategy to stay afloat; but while it may have worked for a little while, the sharp drop in share price could put an end to this methodology. Indeed, it is not going to be as easy to raise a similarly large amount of money with an issuance, next time.

In addition, lower share price will serve as a kind of obstacle to stand in the way of any Sundial Growers expansion plans via new acquisitions that use shares as a form of payment. After all, this is how they have been financing its SunStream Bancorp division cannabis investments, even as recently as with their acquisition of Alcanna. Unfortunately, though, this slip could dramatically disrupt Sundial's early-stage plan for that cannabis acquisitions divisions to spin off as a separate entity with its own, eventual, public option, as a business development firm.

As a matter of fact, at Sundial Growers' most recent earnings call, CEO Zach George lamented that this company is an “enviable position as we witness a reckoning taking hold in the Canadian cannabis market.” Effectively, he argues, aggressive cash buyouts across the industry—combined with reduced capital access and more cautious investor outlook—will probably lead to accelerated rationalization at a time when the industry is slowing down towards what appears to be an eventual oligopoly.

Is The Oligopoly Inevitable?

While this may be the opinion of one cannabis executive, cannabis stocks—as a whole—have fallen drastically over the last 12 months. But even if it is easy to track the decline of share prices, it is not explicitly clear why investors are starting to shy away from once-booming cannabis stocks.

One persistent belief is that rising interest rates are the culprit. When prices go up, businesses at a smaller stage of growth—like the vast majority of cannabis companies—suddenly become much riskier because they need to generate more profit levied against each dollar borrowed just to compensate for the interest.

High borrowing costs could push some companies to the limit, forcing them to make drastic decisions to stay afloat. In the growing cannabis industry, these dire measures certainly include consolidation; and we are already seeing this happen in the still-very-young cannabis industry.

Analysts Give Sundial Stock Mixed Ratings

While at least one analyst has advised this stock is a Buy, most would recommend a Hold rating. This rating has remained the same throughout May, which has also held the same rating from the prior period. It might be worth commenting that the Sundial Growers consensus rating is better than the average rating of other medical companies. In fact, Sundial Growers might outperform other stocks in the same category by as much as 5 percent.

Of course, it should also be noted that the value of this stock is near its all-time low, which was its previous price. More importantly, though, the current value is far from the stock's 52-week high of $1.12.

Companies in This Article:

CompanyCurrent PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
Sundial Growers (SNDL)$0.33+0.2%N/AN/AHold$0.70

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