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This Canadian cannabis grower lost 35% of its value (nearly $400 million in market cap) in a matter of hours.

Sean Williams

In recent years, you’d struggle to find a more attractive investment opportunity than legal cannabis. Investors who had the foresight, and luck, to buy into the most popular marijuana stocks years ago are probably sitting on huge gains today, even with pot stocks having retraced significantly off their highs over the past four months.

One of the big reasons marijuana stocks have delivered such impressive gains — aside from their robust growth potential — is their improved visibility. Entering this week, one dozen cannabis stocks were listed on either the New York Stock Exchange or Nasdaq. Although most of these pot stocks uplisted from the over-the-counter (OTC) exchange, the point is that they’re now listed side by side with time-tested businesses, likely generating more buzz and higher daily trading volumes than they were on the OTC exchange, and perhaps even attracting Wall Street coverage and investment. This is why we’ve witnessed a growing push by marijuana stocks to list on major U.S. exchanges, when possible.

A television studio inside the Nasdaq exchange, with the electronic big board in the background.

Image source: Nasdaq.

Sundial Growers implodes on its first day of trading

On Thursday, Aug. 1, Alberta-based Sundial Growers (NASDAQ:SNDL) did something that only two cannabis stocks before it had done: It debuted via the initial public offering (IPO) route on a major U.S. exchange. Only cannabis-focused real estate investment trust Innovative Industrial Properties and bottle rocket grower Tilray went the IPO route prior to Sundial’s debut on the tech-heavy Nasdaq exchange.

However, unlike most marijuana stocks, which have generally been well received by Wall Street, Sundial Growers’ debut was not a thing of beauty. In fact, it was an outright buzzkill, with shares of the company shedding 35% of their value. To put this into better context, Sundial’s market value, based on its listing price, was just under $1.1 billion. But following just a few hours of trading, its market cap had shrunk to around $700 million.

Less than a day before debuting on the Nasdaq, Sundial upsized its offering allotment to 11 million shares from 10 million, with underwriters possessing an over-allotment option of up to 1.65 million shares. At the $13 midpoint of its pricing range, Sundial looked to raise as much as $164.5 million. 

A gloved processor trimming a cannabis flower.

Image source: Getty Images.

The Sundial thesis

The question you’re likely asking is: What does Sundial plan to do with this money?

The answer is that it would be used to complete and ramp up production at its three grow farms in Canada — Olds, Rocky View, and Merritt, the latter of which is awaiting licensing from Health Canada — as well as complete expansion of hemp-growing facility Bridge Farm in the U.K. The company currently sells cannabis under the Sundial, Top Leaf, and BC Weed brand names, and it has existing relationships via Bridge Farm with the likes of Tesco and Amazon.com

When fully operational, Sundial Growers expects to generate up to 95,000 kilos of peak annual output in Canada, making it a fringe major producer, with 3.6 million square feet of eventual growing space earmarked in the U.K. at Bridge Farm for hemp production. As a reminder, hemp is a relatively low-cost crop that’s rich in cannabidiol (CBD), the highly popular nonpsychoactive cannabinoid that’s best known for its medical benefits. With a real focus on medical cannabis, this fits right into Sundial’s thesis of providing healing and helping health and wellness products around the world.

Sundial has also been quite the acquirer of late, meaning its newfound cash pile could help its global inorganic expansion efforts. For instance, Bridge Farm became a wholly owned entity only about a month ago via a cash-and-stock deal. With an international focus, it would not be surprising to see Sundial put this capital to work in overseas markets. After all, Canada is expected to be a relative small fry in terms of peak annual sales when it comes to worldwide cannabis and cannabinoid revenue potential.

A person holding a magnifying glass over a company's balance sheet.

Image source: Getty Images.

Here’s why this new cannabis IPO was clobbered

So, you’re probably wondering why, then, did Sundial Growers’ stock get absolutely taken to the woodshed if it has such bright prospects? The answer looks to be in the company’s income statement.

Although a vast majority of cannabis stocks are losing money right now — which is especially true for Canadian growers — what investors who took a gander at Sundial’s prospectus would note is that Sundial Growers is lagging many of its peers with regard to ramp-up. Whereas most major growers (i.e., those with 100,000 kilos or more of annual peak potential) have been generating revenue for one, two, or more years, Sundial generated no revenue in 2018, and recorded a mere $1.69 million in gross sales in the first quarter ($1.5 million net after excise tax paid). Being late to the game could cost Sundial valuable opportunities to gobble up early stage market share.

Aside from only recently becoming a revenue-producing grower, Sundial’s expenses are beginning to soar, leading to substantially larger losses. Putting aside the $28.8 million the company paid in financing costs last year, it lost $27.7 million from operations in 2018. But in the first quarter of this year alone, operating losses came in at $17.5 million. Though we’d expect to see general and administrative and marketing expenses rise as operations ramp up, it was the 709% year-on-year increase in share-based compensation that really ballooned the company’s losses.

Furthermore, about a third of the company’s pro forma total assets are tied up in goodwill, primarily from the Bridge Farm deal. It’s possible that Sundial recoups its premium paid, but we’ve also begun seeing our fair share of writedowns throughout the marijuana space. 

In other words, we have another Canadian grower that looks to have a focus on higher-margin medical patients but is late to the game in rolling out its product. This isn’t to say that Sundial Growers won’t be wildly successful, so much as it confirms that investors in the cannabis space are now taking more of a “show me” approach with these companies.

Sean Williams has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends Innovative Industrial Properties and Nasdaq. The Motley Fool has a disclosure policy.”>

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