The weak Sundial Growers (SNDL) IPO is another sign that the cannabis sector has lost steam. The good news is that more reasonable stock valuations are persisting after a period of hype for Canadian cannabis stocks. This cannabis company remains unproven so the best way to handle similar IPOs, whether tech, biotech or cannabis, is to wait for official quarterly results to better analyze the company.
Sundial Growers priced the IPO of 11 million share at $13. Underwriters have an over-allotment option of 1.65 million additional shares. The total shares sold of 12.65 million will raise gross proceeds of $164 million.
The pricing and initial trading is a stark contrast to what occurred with Tilray (TLRY) back about a year ago in 2018. That IPO was anointed as a giant winner with the stock surging to a high of $300 in days after pricing at $17, above the initial range of $14 to $16.
Sundial has traded down in the $12s for the majority of its initial post-IPO trading. The stock even plunged to a low near $8 on the first day of trading.
Similar to most Canadian cannabis players, Sundial Growers is in major expansion mode. The company didn’t have any revenues last year, but the company has plans of reaching 75,000 kg of cannabis production by the end of 2019 and a future ramp to 95,000 kg. In addition, Sundial plans a major hemp facility in the U.K. that the company bought and is converting from a traditional farm covering 1.6 million square feet with plans to expand to 3.6 million square feet.
The company has the potential for $300+ million in revenues next year with a market cap slightly below $1.1 billion based on 84 million shares outstanding including the over-allotment shares. One can’t really argue that the IPO valuation is that far off from where Tilray priced their IPO. The company had limited revenues and a market valuation of $1.5 billion before the stock exploded higher.
The difference with Sundial Growers is that the market now has a handful of companies trading on major stock exchanges along with more respected stocks trading on the CSE and OTC markets. The scarcity value obtained by Tilray just won’t be repeated.
In addition, Sundial is a mixed bag with Q2 net revenues reportedly topping C$18 million and the U.K. farm purchased on July 2. The financial details of those operations are highly unknown at this point. Sometimes, the best option is to let the company provide detailed financials from a couple of complex business moves without trying too hard to build a potentially flawed business model.
The key investor takeaway is that the Sundial IPO further proves that the Canadian cannabis market has cooled. The stock has an intriguing valuation considering the cannabis operations in Canada and the hemp business in the U.K.
Despite some intrigue, investors are better off to make an investment based on a more informed decision after Sundial reports Q3 results in a few months. The ideal plan is to set the stock on a watch list and safely watch the stock from a distance for now.
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