3 Reasons Why SNDL Could Be the Best Cannabis Stock of 2024 and 2025

SNDL (SNDL) looks like it’s on its way to becoming a top cannabis stock. Between making a lot of operational improvements and buying up a lot of local competitors, the company’s Canadian cannabis segment is going from strength to strength even as its alcohol business is also taking a hit.

And that’s why it’s in the running for the title of best cannabis stock this year and has a chance to win next year as well. Here’s what’s driving the company’s rise and three reasons to be optimistic about its future.

1. Has lots of cash on hand and a history of using it

As of its Aug. 1 second-quarter earnings report, SNDL had C$783.6 million in cash, cash equivalents and investments. This is an amazing amount compared to major competitors such as Tilray Brandswhich is a much larger business by market capitalization. Critically, the company has a good track record of using its cash for strategic gain.

Consider the 2022 acquisition of Alcanna, Canada’s largest privately held liquor retailer. The acquisition cost SNDL a total of $320 million in cash and stock. But as of Q2, the alcohol segment brought in a gross profit of $35.7 million of the company’s total gross profit of $58.1 million for the quarter.

In other words, SNDL has taken its cash and turned it into a stream of profits that won’t die down anytime soon. The Alcanna acquisition is just one of many, most of which are focused on buying cannabis businesses in Canada. And through its SunStream Bancorp segment, SNDL is now using its cash pile to generate low-cost profits in the form of interest payments. It has also recently exercised opportunities to convert its loans into equity stakes, soon to include players in lucrative markets such as the US

None of its competitors can claim to be as aggressive or as efficient with their large investments, and this is a major point in SNDL’s favor.

2. It will soon start generating cash instead of just burning it

As savvy investors know, while it can sometimes be enough to turn a profit by carefully managing a cash hoard, it’s usually a much more attractive proposition for shareholders when a company can bring in cash from its operations. SNDL isn’t there yet, but there’s reason to believe it will be in a few quarters. Here’s why.

SNDL has just begun an efficiency process that management expects to recoup CA$20 million in annual cost savings. While the initiative will cost CA$11.8 million, it should leave the company in a much better position once everything is wrapped up in the next 18 months. As of Q2, its net loss from operations was just $5 million. This means that there is a very high probability that SNDL will start reporting free cash flow (FCF) consistently for the first time fairly soon.

The cash generation will allow it to be even more aggressive with its acquisitions, as well as any organic growth initiatives it wants to pursue, such as its efforts to open more stores in British Columbia. There is now a future where it’s possible to imagine the company even paying a dividend, though it won’t be anytime soon.

The other key takeaway here is that it will become cash flow positive at a time when the Canadian marijuana market is anything but vibrant, and at a time when even liquor sales are down somewhat despite the holiday season of summer. And if SNDL can continue to generate free cash flow, it will be another big vote in its favour.

3. Management has good instincts

Considering the above two points, it is hard to avoid the conclusion that SNDL’s management team knows what they are doing.

Its transition from cannabis company to the conglomerate it is today was not guaranteed. Nor maintaining a respectable amount of its cash reserves while pivoting into a new line of business (alcohol) and struggling with unprofitability in what was previously its core segment (cannabis). These successes are not accidental.

Leading the team is CEO Zach George, who has been in his current position since early 2020. Notably, George has a seat on the board of directors, but is not the chairman of the board, as is usually the case. This distinction may imply a higher level of management oversight by other board members, which could also contribute to SNDL’s effective governance.

However, shareholders should recognize that a strong management team with a proven track record is a hard-to-find asset in the cannabis industry, and this is a reason to consider buying SNDL.