Shares of cannabis companies Sundial Growers (SNDL) and Greenlane Holdings (GNLN) have grossly underperformed the broader markets. While SNDL stock is down 92% from its record high, GNLN stock has fallen 81% from its all-time high. However, the sell-off in these pot stocks might provide contrarian investors an opportunity to generate outsized gains in case they stage a comeback.
The marijuana market is expected to rapidly expand given the recent wave of legalization in several U.S. states as well as in other international markets. Let’s take a look to see which is a better stock poised to move higher in 2021 and beyond.
Sundial Growers (SNDL)
SNDL is a Canadian pot producer that has seen its stock price swing wildly in recent trading sessions as it has been part of a short squeeze initiated by a group of retail traders on Reddit.
However, similar to most other marijuana producers, SNDL is grappling with falling sales and negative profit margins. The company reported a top-line decline of over 30% in Q1 and a negative gross margin.
SNDL now aims to shift towards selling high-margin products and reduce its product portfolio in upcoming quarters. The company has also invested in other cannabis companies, thereby diversifying its revenue base. In Q1, revenue derived from these investments was higher than its cannabis sales.
The company also ended the quarter with close to $755 million in cash and a debt-free balance sheet. This will allow the company to further its investment business as well as consider accretive acquisitions in 2021 and beyond while providing it with leeway to improve the bottom line.
SNDL stock is valued at a market cap of $1.97 billion, which means its trading at a forward price to sales multiple of 40.7x which is sky-high. While Wall Street expects the company to decrease sales by 4% to $48.38 million in 2021, its forecast to increase sales by 50% to $72.5 million in 2022.
Greenlane Holdings (GNLN)
GNLN is not a pot producer, but sells cannabis accessories as well as specialty vaporization products in the U.S., Canada, Europe, Australia, and South America. It provides vapes, liquid nicotine, pipes, storage solutions as well as other related accessories and merchandise.
In the first quarter of 2021, GNLN reported sales of $34 million, which were 0.4% higher compared to the prior-year period. Its VIBES brand performed exceptionally well in Q1 as sales were up 73% at $2.7 million. The company’s sales grew 18.4% to $8.5 million, accounting for 25% of total sales in the March quarter. Comparatively, its non-core sales fell 65% year over year to $1.71 million in Q1.
GNLN acquired Eyce in Q1. Eyce was the world’s leading brand of silicone smoking products. It also announced a definitive merger with KushCo Holdings which will establish the combined entity as the leading ancillary cannabis company.
The company is valued at a market cap of $67 million. Analysts expect sales to increase by 17.3% to $162 million in 2021 and by 48% to $240 million in 2022. We can see that the stock is trading at a really low price to forward sales multiple of 0.51x.
The Verdict
Both Sundial and Greenlane remain unprofitable. However, the two companies continue to focus on acquisition-driven growth allowing them to benefit from economies of scale and improving profit margins going forward. GNLN’s significantly lower valuation and its ability to easily scale its revenue by entering new markets make it a better bet compared to SNDL, which is a cannabis producer and part of a highly regulated industry.
SNDL shares were unchanged in after-hours trading Monday. Year-to-date, SNDL has gained 123.86%, versus a 14.12% 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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