Here’s a pot pop quiz for you: Name the most popular marijuana stock on the Robinhood trading platform. If you answered Aphria, Aurora Cannabis, or Canopy Growth, you’re close but no cigar.
The correct answer is Sundial Growers (NASDAQ:SNDL). It’s not surprising why the Canadian pot stock is so popular with Robinhood investors. Sundial’s shares have skyrocketed more than 440% over the last six months.
Some investors have made a lot of money with Sundial. Others hope to do so. But could Sundial Growers even be a millionaire-maker stock?
What it would take
Let’s be purely analytical here. Exactly what would it take for Sundial to make you a cool $1 million? We first have to start with the size of the initial position in the marijuana stock.
Obviously, if you start out owning $900,000 worth of Sundial Growers shares, the stock wouldn’t have to increase all that much to make you a millionaire. That’s not realistic for most investors, of course.
Let’s instead assume an initial stake of $10,000. While that’s more than some investors can afford, it at least gives us a reasonable starting point.
To turn that $10,000 investment into $1 million, Sundial’s market cap would have to grow from around $1.9 billion to close to $190 billion. Is the cannabis market even big enough to support a company that size? Maybe.
A stock with a price-to-sales multiple of 5 would need to have annual revenue of $38 billion to sport a market cap of $190 billion. Grand View Research projects that the global legal cannabis market will reach $84 billion by 2028. That means Sundial would have to snag a 45% market share.
Of course, we don’t have to limit our time horizon to the next seven years. When Constellation Brands bought a major stake in Canopy Growth in 2018, the beverage alcohol giant estimated that the global cannabis market could top $250 billion within the next 15 years. That projection lowers the needed market share for Sundial to be a millionaire-maker to around 15%.
Now for a reality check: Sundial Growers isn’t anywhere close to raking in sales of $38 billion per year. In 2020, the company’s gross revenue totaled 73.3 million in Canadian dollars. That’s around $58 million U.S. dollars.
Sundial’s market share in Canada during the fourth quarter of 2020 was 2.7%. But that number trended in the wrong direction. In the third quarter, the company’s market share stood at 3.5%.
Even if Sundial begins capturing a larger market share, generating strong sales growth won’t be a piece of cake. The company expects cannabis prices to fall in 2021 because of intense competition and an oversupply of cannabis in Canada.
More important (and more daunting), Sundial only operates in Canada right now. The only way for it to have a chance of claiming a 15% global market share is to enter the U.S. and European cannabis markets. The bad news is that the U.S. remains off-limits as long as marijuana is illegal at the federal level.
That situation could very well change in the not-too-distant future. However, Sundial faces a decidedly uphill battle to win against companies that are stronger financially and already have operations in the U.S.
Is it possible that Sundial Growers could be a millionaire-maker stock? Sure, theoretically. However, it’s also possible that a meteor will land 10 feet away as you read this. Possible, but highly improbable.
Sundial isn’t likely to turn $10,000 into $1 million. With the prospects of more dilution on the way, the stock could more easily turn $10,000 into $5,000. If you’re looking to get rich by investing in marijuana stocks, there are other alternatives with much more attractive risk-reward profiles. They might not make you a millionaire, either, but they’re safer bets than Sundial.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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