Canadian cannabis stocks have grossly underperformed the broader markets over the past couple of years. Most of them have been grappling with industry-wide issues, that include the slow rollout of retail chains in major Canadian provinces, competition from a thriving black market as well as overvalued acquisitions.
This in turn led to tepid demand for cannabis products, high inventory levels, widening losses, and multi-billion-dollar goodwill write-downs. Further, in order to offset cash burn, cannabis companies have raised equity capital several times, which has diluted shareholder wealth and contributed to their stock decline.
However, the marijuana market in Canada continues to expand and cannabis legalization efforts around the world makes these stocks compelling bets for long-term growth investors. In this article I’m going to analyze two canadian cannabis stocks, Sundial (SNDL) and Cronos (CRON), to see which is the better buy now.
Sundial Growers (SNDL)
Sundial shares went public in August 2019 at a price of $10.45. The company then had 82.8 million shares outstanding. This number has grown to 918.84 million at the end of 2020 and the total outstanding share count currently stands at 1.86 billion.
While the shareholder dilution has been exaggerated, Sundial has a cash balance of $753 million and is debt-free. Given that the company spent $34.4 million in operating activities in Q1 it has more than five years of liquidity left in the bank that can be easily accessed.
Sundial is also diversifying its product mix and has drastically reduced its cannabis portfolio. It aims to sell higher-margin products to improve its profit margins. Sundial has also funded other cannabis companies and generates revenue via interest payments while continuing to look for acquisitions that will be highly accretive.
Earlier this year, Sundial disclosed its entering into a joint venture with investment management company SAF Group. SNDL has invested $430 million in this venture and aims to provide capital to cannabis producers in the form of debt and equity.
Cronos Group (CRON)
Valued at a market cap of $2.62 billion, Cronos Group stock is down 70% from record highs. Similar to most other marijuana producers, Cronos is eyeing the highly lucrative market in the U.S. Cronos has already launched hemp-based products in the U.S. and has an option to acquire a 10.5% stake in PharmaCann. The latter is a U.S.-based cannabis operator, but the business can only be integrated with Cronos once marijuana is legalized at the federal level in the country.
PharmaCann has a presence in six U.S. states and its disciplined capital allocation attracted Cronos towards the partnership. Cronos Group will also benefit from the investment of Altria Group, which owns a 45% stake in the cannabis giant. Altria’s backing will provide Cronos with the financial flexibility required to tide over near-term headwinds.
The verdict
We can see both Sundial and Cronos are not completely out of the woods and might remain volatile in the upcoming months. However, Cronos Group is forecast to increase its sales by 54.7% to $72.26 million in 2021 and by 84% to $133 million in 2022. Comparatively, Sundial sales are expected to decline by 10.6% to $45 million in 2021 before rising by 55.5% to $70 million in 2022.
Cronos stock is trading at a forward price to 2022 sales multiple of 25.2x while this ratio for SNDL stock stands at 22x. While Cronos is trading at a higher valuation, it's also growing at a faster pace and has the support of a giant such as Altria, making it a better stock to add to your cannabis portfolio.
SNDL shares were trading at $0.80 per share on Friday afternoon, down $0.02 (-2.74%). Year-to-date, SNDL has gained 68.95%, versus a 18.17% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditya Raghunath
Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist.
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