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Sundial vs. Canopy Growth: Which Cannabis Stock Is a Better Buy?

Canadian cannabis companies Sundial (SNDL) and Canopy Growth (CGC) are expected to narrow their negative margins going forward, making these underperformers possible solid investments for contrarian investors. Which stock should be on your buy list right now?

Canadian cannabis stocks have been on a downtrend the past few months, as evident by the 18% loss for the ETFMG Alternative Harvest ETF (MJ).  However, these stocks remain popular with investors.

That’s because the worldwide marijuana industry is forecast to reach $90.4 Billion by 2026, up from $20.5 billion in 2020.  Long-term cannabis investors seem eager to scoop up shares of these stocks at cheaper prices.

With that in mind, today I’ll analyze Sundial (SNDL) and Canopy Growth (CGC) to see which Canadian cannabis stock is a better buy.

Sundial stock is down 94% from record highs

Sundial has taken investors on a volatile ride since it went public two years back. SNDL stock is down 94% from all-time highs and is currently valued at a market cap of $1.46 billion. In the second quarter of 2021, it reported revenue of $9.15 million which was lower than Wall Street estimates of $9.43 million and over 50% below its prior-year sales of $20.19 million.

However, the company managed to reduce its EBITDA loss to $200,000 in Q2 from $3.9 million in the year-ago period. Its CEO Zach Georg explained, “Following Sundial's restructuring in 2020, we have been able to rapidly reshape the business model to focus on a two-pillar strategy that we believe will position our shareholders for future success."

Sundial’s core cannabis operations are vertically integrated post its acquisition of the Spiritleaf retail network. Now, the company is looking to expand its investment operations by plowing capital into this segment, in partnership with SunStream Bancorp., via a joint venture.

It also attributed its tepid Q2 performance to the liquidation of discounted inventory and a pullback in cultivation activities which has helped boost the bottom line.

In the last two quarters, Sundial has looked to reduce its product portfolio and focus on its investment business segment. It derived $3.34 million in interest and fee revenue and $2.36 million in investment revenue in Q2. In the prior-year period, this segment did not even exist.

Canopy Growth is down 30% in 2021

Canadian cannabis heavyweight Canopy Growth has lost close to 30% in market value year-to-date. But this company remains a popular choice among pot investors as it’s a marijuana leader and enjoys a market share of 15.2% in Canada.

It ended its fiscal Q1 of fiscal 2022 ending in June with a cash balance of $2.1 billion which provides it with enough leeway to improve profit margins going forward. Analysts expect Canopy Growth to increase sales by 31% to $715 million in fiscal 2022 and by 36% to $971 million in 2023. Comparatively, its loss per share is forecast to improve from a loss of $4.69 per share in 2022 to $0.43 in 2023.

Canopy Growth reported a net profit in Q1 but this was driven by fair value adjustments of derivative liabilities. The company is also backed by Constellation Brands which gives Canopy additional flexibility in terms of debt and equity funding.

The verdict

Even though Sundial has pivoted its business model and is focused on growing its investment business, I believe Canopy Growth is a better stock to place your bets on due to rising revenues and improving profitability. 

SNDL shares rose $0.01 (+1.40%) in after-hours trading Tuesday. Year-to-date, SNDL has gained 49.95%, versus a 19.54% 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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