Shares of SNDL (NASDAQ: SNDL) can't seem to stop crashing. Down 77% in the past 12 months, the stock has been in an even deeper free fall than other cannabis companies. It's trading at $1.54 per share at Tuesday's market close, and the closer it gets to the $1 mark, the more inevitable another reverse split becomes. Should investors brace for another share consolidation, and if so, what does that mean for the stock's future?
Is there anything that can save the stock from another reverse split?
It was July of last year that SNDL announced it was consolidating its shares on a 1-for-10 basis. When it obtained shareholder approval, it got the OK for a reverse split of up to 1-for-25, suggesting that the next reverse split may not need a new approval provided it occurs before the July 25, 2023 deadline. The odds look good that SNDL will do another share consolidation because at this rate, there's little to suggest that the falling stock will be able to turn its fortunes around. And if it already has approval, there's an incentive to do it before the deadline, even if it doesn't fall below the $1 mark by then.
Management announced that SNDL's next earnings numbers (for the fourth quarter and full year 2022) will come out on April 14, and I don't believe they will dramatically change investor sentiment. While the company forecasts record revenue and cash flow based on its unaudited financials, it also notes that there will be a "material provision for impairment of goodwill related to the decline in share trading price of Nova Cannabis Inc." What's worth noting is that while the company mentioned record revenue and cash flow, it made no such reference to overall profitability on its latest press release (dated April 3), suggesting a big loss could be coming.
Does another reverse split really matter?
Stock splits only affect the number of shares you own, and the price of the stock. Your investment in the business doesn't change -- you'll simply have fewer shares at a higher price. In theory, it shouldn't make a difference for investors. However, it can often lead to increased bearishness as a reverse split occurs because a stock is trading poorly and a company normally deploys the move to stay on a major exchange such as the Nasdaq Stock Market, where shares of SNDL trade.
From that point of view, news of another reverse split shouldn't matter to investors, but it can, nonetheless, bring the stock further down in value due to the negative connotation associated with it.
What matters is what happens next
SNDL investors should brace for the inevitability of another reverse split. But that won't dictate where the stock goes from there, and whether it's a good buy.
Instead, what investors should focus on is the company's financial performance and whether all the acquisitions it has been making are making the business a better buy. While SNDL's sales will be up due to adding more businesses into the mix, including the addition of cannabis extraction company Valens in January, it's a poor bottom line that often has cannabis investors concerned and that leads to producers scaling back on their operations.
In its most recent results, for the period ending Sept. 30, 2022, SNDL incurred a net loss totaling 98.8 million Canadian dollars, driven in large part by impairment charges of CA$86.5 million. And on CA$230.5 million in revenue, the company's gross margin of CA$50.3 million was relatively light at just 22% of the top line. That's particularly problematic when the company's general and administrative costs alone total CA$45 million, making it difficult for the business to have any chance of turning a profit.
SNDL needs to improve its margins and shed some cost from its expenses. That would have a much greater impact on the stock's future than a reverse split, as bearish as that might be in the short term.
Investors are taking a big risk holding shares of SNDL
SNDL's business isn't in great shape as growing via acquisitions can certainly boost a company's top line but it can also mean more redundancies and expenses along the way. And those inefficiencies need to be eliminated for the company to also strengthen its bottom line after acquisitions. SNDL has a lot of work to do and it's still nowhere near being an investable business at this stage; there's simply too much risk, even at a significantly reduced valuation. Investors are better off going with other, safer growth stocks instead.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool recommends SNDL. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
