How do you lose money selling weed in a pandemic when everyone’s stuck at home? Sundial Growers, Inc. has found a way.

Sundial is the darling of Reddit’s Wallstreetbets. It’s mentioned far more than any other stock currently:

But popularity on Reddit may not save this failing business. It lost $176 million (CAD) in the first 9 months of 2020 (much more than in 2019), despite a growing cannabis market:

How? Part of the story is something called “inventory obsolence.” Sundial lost $38 million because of it in the first three quarters of 2020. Sounds like their weed isn’t selling and winds up sitting in warehouses until it’s no longer any good.

Revenue growth is minimal. Gross revenue only went from $51 million to $56 million, if you compare Jan-Sept of 2019 to 2020. Growth is poor enough that Sundial is actually shutting down parts of their grow operation. From their financial report:

Due to decreasing estimates for the size of the potential Canadian cannabis market, the Company has curtailed the number of flowering rooms being used for cultivation at its Olds facility.

The situation is so bad that the company may soon run out of money. Sundial had $21 million in cash left as of 9/30/20. They burnt $25 million in the first 9 months of the year. Are they gone 9 months after that (mid-2021)?

The one thing keeping them afloat is reprieves from lenders and selling more shares. They’ve done new share sales on a grand scale, which means you own less of the company:

Any delay or failure to complete any additional financing would have a significant negative impact on the Company’s business, results of operations and financial condition, and the Company may be forced to curtail or cease operations or seek relief under the applicable bankruptcy or insolvency laws.

And the patience of those lenders is already probably running out, since Sundial keeps violating its loan agreements with poor performance. Sundial is:

in non-compliance with its loan covenants (note 11a) as at December 31, 2019 and March 31, 2020.

Those lenders forced the sale, at a loss, of a major asset recently: the Bridge Farm, that was supposed to sell CBD to the UK market.

The overall picture is of a company selling off some operations, shutting down others, burning cash faster than they can get customers to burn their weed, and barely skirting bankruptcy.

My friends at Reddit might get lucky if they can pump up the price enough by getting other small traders to buy in. But the risk here is off the charts. It’s a fundamentally terrible business and it would be hard to even engineer a short squeeze like they did on GameStop. (If you’re not familiar with short squeezes, read this.)

Bottom line: the fundamentals are terrible and the technical factors aren’t much better. Pass on this one and live to fight another day.

If you found this post interesting, please share it on Twitter/LinkedIn/email using the buttons below. This helps more people find the blog! And please leave a comment at the bottom of the page letting me know what you think and what other information you’re interested in!