Canadian marijuana company Sundial Growers (NASDAQ:SNDL) is a much safer investment than it was at the start of the year. Although the business is struggling to generate revenue growth as it transitions to branded retail sales, its financial position remains strong. Its level of cash burn is sustainable and it has been exploring some attractive growth opportunities of late.
That could make the meme stock a popular option for retail investors willing to sit and wait, hoping that it will generate some excitement again and return to the highs it reached earlier this year. However, in the past, management has been quick to pull the trigger on stock offerings — and that could limit your potential return.
Why dilution is a real concern
While Sundial is in a decent position today, meaning it may not need cash at the moment, management may well do another offering if the stock rises sharply in price. As of Dec. 31, Sundial reported unrestricted cash of more than 60 million Canadian dollars on its books. During 2020, the business burned through CA$57 million from its day-to-day operating activities, so its unrestricted cash balance wasn’t a huge problem at the start of this year. Although a share offering might still have been inevitable at that point, what surprised me is how quickly and aggressively Sundial’s management made not one but two offerings when its stock popped.
On Jan. 18, the stock soared to a high of $1.36, more than double the prior day’s closing price. The next day, the company announced an offering totaling approximately CA$128 million. The price fell on the news of the share issue, only to climb back up to $1.21 on Feb. 1. On Feb. 2, the company announced another offering, for roughly CA$95 million. Although Sundial’s stock would continue to rise even higher, management has not announced any further offerings as yet.
Again, what stands out here is how quickly the company acted on the activity that came from its meme-stock hype. Management had no way of knowing how long the bullishness would last and quickly took advantage of the opportunity to raise cash at an inflated price. It was a shrewd move to solidify the company’s financial position. However, the worry for investors is whether that is enough money for the foreseeable future and if there will be more offerings ahead, which would lead to further dilution. As of May 7, the company reported its unrestricted cash balance was up to CA$753 million.
Although that seems ample given its previous rate of cash burn, the company has been putting the money to use and may need more of it soon.
Why its current cash balance may not be enough
On July 7, Sundial announced it was increasing its investment in SunStream, a joint venture it created with private equity firm SAF Group to target investment opportunities in the cannabis industry. Initially, Sundial invested CA$188 million, and it has since increased that to CA$538 million. Then, on July 20, it announced that it had completed the acquisition of cannabis retailer Inner Spirit Holdings in a cash-and-stock deal. Supporting Inner Spirit could require an influx of cash, as that company has more than 100 retail pot shops across Canada.
But there could also be other opportunities on Sundial’s agenda. Given its added investment in SunStream and its recent wheeling and dealing, it would be surprising to see Sundial hit the brakes now. More acquisitions and investments could be in its future, and there’s no better way for it to prepare than by boosting its cash balance. That is why management might not hesitate to pull the trigger on another offering, should Sundial’s stock benefit from some renewed bullishness.
Is Sundial worth investing in?
Sundial is a hard stock to evaluate, because which direction its business is going in is mystifying. It is undergoing many changes and acquisitions, which makes it difficult to determine the kind of growth investors can expect from the business, especially over the long term. And unless the stock were to fall significantly in value, the upside may be limited because of how aggressively management has acted in the past when raising cash; an offering may never be too far away.
Its high risk for dilution, declining sales, and a net loss totaling CA$330 million over the past 12 months simply add up to too many reasons to avoid Sundial’s stock for the time being.
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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