Sundial Growers (NASDAQ:SNDL) stock has been quite the volatile ride for investors. Fueled by retail trading frenzy, SNDL stock reached a high of close to $4 in mid-February. After reaching those lofty levels, the stock fell to 72 cents a share due to the largely risk-off sentiment in the market.
However, I still believe the cannabis industry holds plenty of potential and Sundial is an interesting company to watch as it has radically transformed its business.
Starting last year, Sundial began taking the necessary steps to fundamentally change how it operates. Early 2020 found the company in serious financial straits. Management had renegotiated with its lenders to amend a loan agreement.
Using a combination of asset dispositions, equity and equity-linked issuances, and debt for equity conversions, Sundial was able to raise enough cash to quickly pay off its debt.
Capital Raises Highlight SNDL Stock Dilution Concerns
Since then the company has undertaken an array of consecutive successful capital raising activities to further strengthen its cash position. In Q4 2020, Sundial raised $161 million by selling shares of SNDL stock and exercising warrants. In early 2021, the company issued a whopping 741 million additional common shares, receiving $695 million in proceeds. At the end of Q1 2021, the company issued $97.7 million worth of shares and filed for an additional $800 million at-the-market offering.
While dilution in the original core Sundial business is a concern, the successful equity raises means that Sundial now is an entirely new business.
As of May 2021, Sundial has cash and liquid assets on hand of about $752.7 million. Credit to the company’s management team and CFO for navigating this difficult time. Sundial is now in an enviable position in the Canadian cannabis industry as it is now one of the only debt-free players. The company can now focus on acquiring assets at attractive prices.
Massive Opportunity for Cheaper Investments
There is currently an oversupply situation in the Canadian cannabis industry. Last October, Canada had amassed a mind-boggling 1 billion grams of cannabis inventory. This is leading suppliers to significantly discount their inventory as dried flower loses its value over time. This situation will eventually lead to bankruptcies and facility closures of the weaker players.
In the short term, the state of the Canadian cannabis industry may seem dire, the long-term prospects still remain. The issue was that post-legalization growers overestimated the initial demand for cannabis. However, this is a great opportunity for Sundial as it is able to make strategic investments for much lower prices.
Sundial has started deploying its capital in high-quality investments. The company had invested $22 million, through a mix of debt and equity instruments, in Indiva, an edibles company. The company also invested $188 million in a joint venture with the private equity firm SAF Group. The joint venture will look for investment opportunities in the cannabis industry by leveraging SAF’s expertise.
In May, the company announced that it increased its stake in The Valens Company (OtherOTC:VLNCF) to about 10.1%. So far the company’s efforts have been bearing fruit as it announced $2.8 million of interest and fee revenue and $12.9 million in realized and unrealized gains from its stock investments.
Sundial’s most promising acquisition is Inner Spirit Holdings (OtherOTC:INSHF) for $131 million. Inner Spirit has 86 stores operating under the Spiritleaf brand. Inner Spirit served 2.3 million guests in 2020 and has about 250,000 members in its loyalty program. Sundial will be able to strengthen its retail network with this acquisition. Furthermore, the company aims to achieve significant operational synergies and economies of scale which will be crucial to competing in the industry.
After the massive share price decline, Sundial is now one of the cheapest investments in the cannabis industry. The company has cash and liquid assets of $752.7 million with no debt compared to the current market capitalization of $1.57 billion. This means that investors are getting Sundial’s brands and retail network at a substantial discount. I believe that Sundial is a speculative buy.
On the date of publication, Joseph Nograles did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.