Sundial Growers Stock Up 15% Today – Time to Buy SNDL Stock?

The price of Sundial Growers stock is jumping 15% this morning in pre-market stock trading action following news that the company will acquire a Canadian-based retailer of spirits and cannabis products called Alcanna.

According to the announcement, the deal will be paid in stock in a transaction that is valuing Alcanna (TSX: CLIQ) at $346 million. The Board of Directors of both companies have approved the acquisition but Alcanna shareholders still have to sign off on the proposal. They are expected to meet in December this year to discuss the conditions of the deal. The sale is expected to be settled shortly afterward if it gets the nod from stockholders.

Can this deal ignite a fresh rally in this beloved meme stock? Join me as I take a look at the price action and fundamentals to outline plausible scenarios for SNDL stock for the future.

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Sundial Growers – Technical Analysis

The announcement of this deal is coming at a great time for Sundial Growers stock as the price is tagging a critical horizontal support at the $0.65 level. Moreover, this morning’s pre-market rebound would result in a break above the stock’s short-term moving averages and it may also set things in motion for SNDL stock after months of stalling.

Sentiment and comment volumes in the popular retail trading forum Wall Street Bets have surged today shortly after the company announced the acquisition and that may contribute to fuel a sustained rally in the price of SNDL stock as well if enough traders pile on the $0.50 ITM call options that are set to expire today.

Such a move may cause a gamma squeeze as brokers would be forced to hedge their exposure to these short-dated options contracts by buying the underlying asset.

Meanwhile, data from MarketBeat indicates that short interest for the stock stood at 25.2% by 15 September and it would take short sellers more than 3 days to cover their positions without pushing trading volumes above the average.

With this in mind, today’s price action will likely be bullish for Sundial Growers stock – especially if buying volumes for the short-dated call options mentioned above experience a surge.

Sundial Growers – Fundamental Analysis

Alcanna owns and operates over 176 liquor retail outlets in Alberta and British Columbia and owns around 63% of Nova Cannabis – a cannabis retailer that operates another 53 stores. By adding Alcanna to its portfolio of subsidiaries, Sundial may now generate annualized revenues of approximately $915 million according to the management’s estimates.

Meanwhile, last year, data from Koyfin shows that Alcanna swung to profits after generating $53.7 million in net earnings while it also produced free cash flows of $26 million.

Sundial had a total of $743 million as of 6 October and no outstanding debt. According to the management’s estimations, the company’s current cash per share ratio is $0.36 which accounts for 55% of its yesterday closing price of $0.648 per share.

Upon completing this acquisition, Sundial will become the largest cannabis retailer in Canada by adding Nova Cannabis venues to its portfolio.

With this in mind, if we take for granted the management’s annualized revenue forecasts of $915 million this would result in a price-to-sales ratio of 1.5 based on yesterday’s market capitalization of $1.335 billion.

That said, a total of 428.12 million shares of Sundial will have to be issued to pay for the deal based on the number of outstanding common shares reported by Alcanna during the first quarter of the year and that represents almost 21% of Sundial’s total outstanding shares by 30 June.

The theoretical post-transaction price for this deal would be $0.54 per share for Sundial Growers stock amid its dilutive effect. However, since cash will still be a major component of the valuation, if shareholders of Alcanna approve the acquisition, the deal would strengthen Sundial’s fundamentals.

All things considered, despite the dilutive nature of the deal, Sundial appears to be relatively undervalued based on the positive contribution that this acquisition could have to its top and bottom-line results in the future.

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