kmatija
The numbers concerning SNDL Inc. (NASDAQ:SNDL) are going to change drastically in the next earnings report (expected August 12 after the market close), based primarily upon acquisitions that haven’t been fully accounted for because of the timing of the deals.
So, in the upcoming earnings report, I expect the company will probably get a temporary boost in its share price as the numbers come out; whether or not it’ll be able to find sustainable support will be determined by management commentary concerning the outlook for Alcanna and NOVC, especially.
If guidance is positive, the company could enter into a long-term growth trajectory concerning its performance and share price. Investors should get a much clearer picture of SNDL after the next earnings report, which I think has a good chance of being at least moderately positive.
Latest numbers
The acquisitions by SNDL render 1Q numbers largely irrelevant in regard to revenue and earnings because the numbers have changed so much. For example, net revenue in the first quarter of 2022 came in at $17.6 million, with gross margin of $3.4 million. But when adding the revenue from the acquisition of Alcanna if it had occurred on January 1, 2022, the company would have generated revenue of about $164 million, with gross margin of $36 million.
On the other hand, there are some important numbers to take into consideration in the first quarter, including the improvement in its net loss from $134 million in Q1 2021, to $38 million in Q1 2022. The bulk of that improvement came from “a noncash change in fair value of derivative warrant liabilities of $122 million.” On the downside, investment revenue in the reporting period fell by $31 million.
A key strength of SNDL is its balance sheet, which includes no debt and as of the end of March 31, 2022, had a little “over $1 billion of cash, marketable securities and long-term investments.” This provides it with a solid cushion if an economic rebound takes longer than expected.
Since SNDL has incorporated a strategy of growth through acquisitions, it’s important for investors to take a close look at each unit after the upcoming earnings report release. I also believe the market may be not taking the liquor and cannabis retail outlets of SNDL into account when evaluating the company.
Those are the things to look closely at in the months ahead.
Reverse split concerns
When searching around on social media for the purpose of finding out what the sentiment concerning the recent reverse split by SNDL in order to retain its listing on the Nasdaq, I found the sentiment was mostly negative, although the majority of that was obviously from those that bought at a high price and either lost a lot of money or remain bag holders.
In other words, the negative commentary is skewed because it’s largely based on negative investing experiences related to buying at high prices before they crashed.
In reality, a reverse split is, for the most part, a neutral event. For example, in the case of HIVE Blockchain Technologies (HIVE) in the crypto space, it initiated a split in order to protect itself from being delisted, and yet the overall fundamentals of the company were solid. Its split was related to the drop in its share price in response to the falling Bitcoin (BTC-USD) price. The split wasn’t related to problems in the company’s operations, but problems outside of its control.
In the case of SNDL, much has been made that it has the option of having even more splits. I think that’s more of a positive than a negative in the current economic conditions the company is operating in. This allows it to protect its listing if the recession we’re in ends up going deep and long. I don’t see that happening at this time, but it covers the company’s basis in case it does.
I look at it as a wise decision, based upon the growth the company has entered into with its acquisitions. Again, the next earnings report will provide a clearer picture of what SNDL is at this time. The rapid changes it has engaged in make it impossible to know for now.
Even though the company has underperformed for quite some time, this is no longer the same company.
Conclusion
The acquisition of Alcanna, in particular, has completely changed what SNDL is concerning revenue, earnings and gross margin, among other numbers. It’s far larger than it was at the beginning of 2022, and now has a huge presence across Western Canada.
As mentioned earlier, I don’t think investors have priced in the value of the large retail presence it now enjoys in the cannabis and liquor markets in Canada. Adding that to the boost in revenue coming from Alcanna in general, and SNDL may be close to sustainably turning around its growth prospects.
We still need to bear in mind the macroeconomic conditions SNDL is operating in, but overall, with its strong balance sheet, new acquisitions, and strong retail presence in Canada, it is positioned well to endure the current economic weakness while increasing revenue, earnings, and margins.
I’m not suggesting SNDL is out of the woods yet, but I do think it has turned the corner. That doesn’t mean there is going to be an immediate and sustainable positive growth trajectory in the near term, but I do think it now can ride out a weak economy while building out its current brands.
Even with these many positives, I consider a speculative play that warrants a small portion of capital allocated for that purpose. After the earnings report, there will be a much clearer picture as to the near-term prospects of the company, and the speculative designation could be removed to a buy.
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