In growing industries, sometimes the competitive landscape can change overnight as businesses change their strategy or forge creative new paths in an attempt to secure their future dominance.
The cannabis industry is no exception, and in that vein, SNDL (NASDAQ: SNDL) just dropped a bombshell announcement that might disrupt the North American marijuana industry, perhaps forever. Here's what's going on with this Canadian cannabis and alcohol company formerly known as Sundial Growers and why it's a critical concern for investors.
Entering the U.S. market on favorable terms is suddenly within reach
In its fourth-quarter and full-year 2022 earnings report published April 24, SNDL casually mentioned that "the company expects that, on a structured and regulatory compliant basis, it may become a majority owner of one or more multi-state operators (MSOs) in the U.S. in 2023." That's a massive new development because it means it will no longer be a business wholly focused on winning in the Canadian market. Plus, it could put the company ahead of rivals like Tilray Brands, which have stalled or otherwise less-than-impressive plans to enter the U.S. cannabis market.
The best part is that SNDL probably won't need to spend many new resources to enter the market, as it already spent them when its marijuana investment subsidiary, SunStream Bancorp, invested in U.S. MSOs. In total, SunStream's portfolio is worth $519.3 million in Canadian dollars, all but CA$150.4 million of which is invested in U.S.-based businesses. It either loaned or made investments in a total of six players, two of which are in the process of being restructured, and all of its lending activity was collateralized. So the debt restructuring process will almost certainly be the way that the company eventually gets majority control of one or more U.S. cannabis operators.
If 100% of SunStream's delinquent debts are converted into equity, the company would add CA$302 million to its revenue, per estimates by management. On top of its 2022 revenue of CA$712.2 million, that'd drive its annual top line to be more than CA$1 billion, which would make it one of the four largest marijuana businesses in the U.S. (and thus also in the world). And that could eventually drive its shares to rise, especially if it makes strides toward profitability and building brand power to defend its growing market share in North America.
Is it time to buy shares?
Despite these promising developments, it's critical for investors interested in a potential stock buy to keep in mind SNDL's position in relation to the market and economic forces it operates in. SNDL CEO Zach George said it best in his most recent annual letter to shareholders:
"In the near term, it is unlikely that any single company will break away from the pack and avoid the broader de-rating of equity values with the cannabis sector in the grips of a full-blown distress cycle and the broader credit and equity markets adjusting to current inflationary dynamics. We are amid the reckoning we've been predicting."
In other words, it's a very risky time to be buying shares of any cannabis stock, whether or not their finances and growth prospects are looking as good as SNDL's are. Between the market's distaste for cannabis stocks, depressed cannabis prices in North America, and the current outsized inflation overall, it's reasonable to expect a further collapse in share prices.
This stock is no exception to the grim conditions described above, and even the CEO is signaling quite explicitly that investors should be cautious. So if you're a conservative investor, you might be better off finding something else to invest in. On the other hand, if you're more of a risk-tolerant investor or speculator, the story here is more promising ... and more complicated.
In 2022, SNDL only burned CA$6.7 million in cash, a dramatic drop compared to 2021's sum of CA$155.8 million, and in Q4 it actually generated CA$28.6 million via its operations. Right now, it has CA$207 million in unrestricted cash and no debt to speak of. It isn't going to run out of money anytime soon, and even in an extremely difficult economic and market environment, it's gaining serious ground toward becoming consistently cash-flow positive. That means, a couple of years from now, it could be one of the survivors of the ongoing cannabis industry shakeout and consolidation phase. And that could leave the people who invested in it today a bit richer.
Therefore, if you're the daring sort of investor, SNDL is absolutely ripe for a purchase today -- just keep your expectations low for the near term, and don't expect your shares to grow until sentiment changes.
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Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool recommends SNDL. The Motley Fool has a disclosure policy.