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Sundial Growers (NASDAQ:SNDL) stock has been a meme stock for most of this year as well as a bandwagon cannabis stock a bit longer.
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It continues to make the news. But the news seems more the result of sleights of hand rather than changing fortunes.
SNDL isn’t alone in being an unprofitable Canadian grower. Most of these stocks soared when cannabis became legal. Most of that buzz quieted down once investors realized that they were only selling to Canada, which has a population about 10% the size of the U.S., or about the population of California.
Also, there’s been a challenge for the Canadian industry because each province has created its own tax plan for cannabis, and it makes a national sales strategy more complicated. It turns out, making money off legit cannabis sales is harder than anticipated.
Plus, there’s still a large underground market operating since the margins are better and the risks are now lower.
SNDL Stock Reflects Hard Lessons
When the whole cannabis trend started, there was a lot of excitement about its potential.
The U.S. market is expected to hit $43 billion in the next four years and 42% of demand will be satisfied with legal purchases. That means 58% of demand is still waiting to be captured by the legal market.
In Canada, that market looks to be much smaller at around $7 billion. With a number of competitors on the local level and difficult tax and provincial structures, national cannabis businesses are still maturing. Rhe current market is saturated with new companies hoping to grow market share.
SNDL stock is one of those hopefuls. But even with its massive market cap it has been twisting itself in knots trying to keep the good times going while earnings and profitability are elusive.
There are other public cannabis companies that are doing the same thing. Some like Canopy Growth (NASDAQ:CGC) and Tilray (NASDAQ:TLRY) have received backing from big corporations in other controlled industries.
Constellation Brands (NYSE:STZ) has pumped $4 billion into CGC, and AB Inbev (NYSE:BUD) put up around $100 million to develop CBD beverages, But nothing has really worked to turn these companies around.
Granted, their larger partners are in it for the long haul, and if the individual companies flame out, their investors will take over the operations and create subsidiaries or spin them off to private equity concerns.
A Messy Market with Minimal Upside
The one thing Canadian cannabis companies really need, and SNDL stock reflects this clearly, is access to the huge U.S. market.
However, the U.S. market already has built out the significant competition, and the big money isn’t even involved yet because pot is still illegal under federal law.
There’s one key lesson that Canada is teaching us about the potential U.S. market. If states and/or the federal government get greedy taxing the industry, they may strangle the cannabis industry before it can mature.
Plus, there will be issues with federal organizations like the Interstate Commerce Commission about moving cannabis products across state lines and where the taxes are generated.
For example, are they taxed in the state where the products are sold or grown? Granted, there are plenty of agricultural crops that already navigate these issues, but cannabis is more like tobacco or alcohol.
Smart investors need to watch this industry grow and use Canada’s current firms like SNDL to learn the pitfalls and possibilities of what could happen when the U.S. market completely opens up.
But we’re not close to that yet, and these stocks have a long way to go before they get even close to the kind of earnings that justify their market caps.
SNDL stock is up 50% year to date and 150% in the past 12 months. Yet even with its new private equity partnership and plenty of cash behind it, it’s still spending more than it’s making. Buying more properties in a money-losing industry doesn’t make it profitable as a company or an investment.
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On the date of publication, GS Early did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
GS Early has been an award-winning financial writer and editor for nearly three decades, working with many of the leading financial editors (Louis Navellier, Richard Band, Steven Leeb, Jim Collins, Roger Conrad, Elliott Gue, Maria Bartiromo, Neil George, Keith FitzGerald, Michael Robinson, and more) during that time. He’s seen a few things and hears more.
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