Is SNDL Stock a Buy?

Meme stocks saw a resurgence over the past month or so, giving rise to some investors taking fresh looks at the various meme stocks out there. One cannabis industry meme stock that was a hot buy in 2021 is SNDL (SNDL 0.91%).

SNDL’s surging share price back then helped its management take advantage and raise much-needed cash to facilitate the Canadian-based cannabis company acquiring other businesses that grew and diversified its operations. As the meme hype faded, SNDL followed the path of other cannabis stocks that saw their share prices plummet. In the past three years, the stock price fell 74%. In 2022, SNDL needed a reverse stock split to keep its share price above $1.

Investors are bullish on the stock again, although it’s trading nowhere near the heights it reached back in 2021. That has some again asking where the business is right now and whether this could be a good growth stock to add to your portfolio today.

SNDL is growing, but it’s not getting a big boost from acquisitions anymore

SNDL reported its latest earnings numbers on May 9. It continued to post growth, albeit at a much slower rate than in the past. In the first quarter, SNDL’s net revenue totaled 197.8 million Canadian dollars, up 3.5% year over year.

A year ago, the cannabis producer reported a mammoth year-over-year growth rate of 1,050%, driven by a huge boost related to acquisitions. A single-digit growth rate, however, is much more realistic for the company moving forward given how competitive the Canadian pot market is.

What’s encouraging is that SNDL has trimmed its costs and is improving its prospects for profitability. In its most recent quarter, SNDL’s operating loss was just CA$4.4 million versus a loss of CA$32.2 million in the year-ago period.

The company is eyeing the U.S. pot market

Today, SNDL’s business focuses on the Canadian market, but the company is looking for ways to take advantage of possible opportunities in the U.S. down the road.

In a move similar to Canopy Growth (CGC -0.70%) and its creation of Canopy USA, SNDL announced in May that SunStream USA will move forward with acquiring U.S. cannabis assets. SunStream USA isn’t a subsidiary, but it is related to SunStream, a joint venture that SNDL sponsors. This setup effectively gives SNDL a “contingent indirect interest” in SunStream USA and the assets it acquires. SNDL says that the Nasdaq has reviewed its planned corporate structure and believes that it will remain in compliance with the exchange’s listing rules.

SunStream USA is likely to end up becoming a majority owner in multiple U.S.-based cannabis companies, giving it assets in as many as five states. SNDL estimates that if legalization in the U.S. were to take place and it is able to acquire SunStream USA’s assets, it could be one of the top five multi-state operators in the U.S. based on revenue.

A big obstacle for Canopy Growth and SNDL is that until legalization occurs in the U.S., they cannot fully acquire and integrate any U.S. plant-touching cannabis businesses into their operations without running afoul with regulators and the exchanges their stocks trade on. These contingent structures, however, give them a way to demonstrate to investors the potential their businesses possess in the long run.

Should you buy SNDL stock right now?

Share prices of SNDL are up 34% this year thanks to excitement in the cannabis industry related to the U.S. government initiating efforts to reschedule marijuana from a Schedule I substance down to Schedule III. That would greatly ease restrictions on how the drug can be used. With the setup of SunStream USA, SNDL is attempting to position itself as a good way to take advantage of opportunities in the U.S. once it is federally permissible to do so.

Unfortunately, it’s a risky option for investors. While SNDL’s growth rate would accelerate if it could enter the U.S. pot market, so could its losses because it would inevitably spend more to grow its operations. And those multi-state operators may not be profitable as there is already an over-supply issue in the U.S. Furthermore, there’s no guarantee that legalization (or even the drug rescheduling) will take place anytime soon. Buying the stock based on the prospects of legalization in the U.S. is a speculative reason to invest in SNDL, and that can leave investors vulnerable should that not come to pass.

Meanwhile, SNDL’s fundamentals aren’t all that great, with the business growing at a single-digit pace and the bottom line still in the red. Overall, there isn’t a compelling reason to buy the stock despite its rally this year. For investors who want exposure to the U.S. cannabis industry, the simple solution may be to just buy shares of multi-state operators that are already generating revenue in the U.S. pot market.