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Sundial Growers Stock: Should Shareholders Vote for a Reverse Split?

With Sundial struggling to meet the Nasdaq's minimum bid price per share, is a reverse share split the best solution for the cannabis company?

Sundial Growers (SNDL) - Get Sundial Growers Inc. Report struggle to meet the Nasdaq's minimum bid price per share requirements continues to haunt investors. The stock has failed to trade above $1 per share for 30 consecutive days.

There are a few options left for Sundial. Instead of seeking another extension from the Nasdaq, should shareholders vote for a reverse share split?

Figure 1: Sundial Growers Stock: Should Shareholders Vote for a Reverse Split?

Figure 1: Sundial Growers Stock: Should Shareholders Vote for a Reverse Split?

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Sundial's Delisting Risk

Sundial has been granted another chance to meet the Nasdaq's requirements by August 8, 2022.

But trading above $1 for 30 consecutive days will be a challenge for Sundial. The cannabis company's shares currently trade around 30 cents per share. The last time they traded above $1 per share was more than a year ago.

Should Sundial fail to meet the Nasdaq's requirements, the stock may be delisted from the exchange.

Sundial’s delisting from Nasdaq would be the worst thing that could happen to the stock. When shares are delisted, they can no longer be traded on a stock exchange and are limited to trading over-the-counter (OTC) in a decentralized market.

The main risks of trading OTC involve increased credit or default risk associated with each contract, systemic risks, lack of transparency due to illiquidity, and also large bid-ask spreads that can make it very difficult to trade the stock.

Why a Reverse Share Split Is the Best Solution

In the best-case scenario, the Nasdaq would grant Sundial another chance to meet its requirements. However, another extension is unlikely because the company has already received two chances to prove it can trade above $1 per share.

A better solution would be a reverse share split. This practice involves:

  • Merging the company's shares to form a smaller number of shares in the float
  • Decreasing liquidity
  • Proportionally increasing share price

Even though the practice is generally not well received by the market — it signals that the company's management has failed in its growth plan — technically, it doesn't change the fundamental value of the company and mainly prevents it from being delisted.

Sundial's management has already announced that it intends to perform the reverse split in the third quarter of this year. However, it will require shareholder approval, which should be obtained during the company's 2022 General Meeting on July 21.

Is Sundial Still A Good Investment?

Looking at the company's business fundamentals, the experts believe Sundial is still a good investment.

ATB Capital Markets analyst Frederico Gomes thinks Sundial is a good opportunity to take advantage of the Canadian cannabis market. He likes the company's diversified portfolio and believes that the stock offers the best risk-reward alternative in the sector. Sundial's strong balance sheet gives it a defensive advantage.

The analyst also thinks that the rapid transformation of Sundial's business has been difficult to track and that the picture will become clearer after we've seen the results from the current quarter — which will include the acquisition of liquor retailer Alcanna.

Finally, Gomes estimates that SNDL has about 31 cents per share in net cash and investments, signaling that the markets are undervaluing Sundial's cannabis operations and its liquor retail operations, which can provide an important upside from current levels.

Frederico Gomes has a price target of 80 cents on Sundial shares and a buy recommendation.

(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting Wall Street Memes)