Sundial vs. 22nd Century Group: Which Cannabis Stock Is a Better Buy?

Cannabis stocks remain a popular choice among retail investors due to their potential to generate market-beating gains in the upcoming decade. There is a good chance for the U.S. government to legalize marijuana at the federal level in the not too distant future which would push demand significantly higher and make it easier for cannabis companies to access traditional forms of capital to fuel their expansion plans.

However, like in all emerging markets, in the cannabis industry there are several companies that are reporting massive losses and trading at steep valuations. There is a good chance for many of the companies in the cannabis space to go bust, given their high cash burn rate and shareholder dilution. But this high-growth industry will also have a few stocks that will generate exponential gains on the back of inorganic growth, an expanding addressable market and the benefits derived from economies of scale.

Keeping these factors in mind, let’s see which cannabis stock, Sundial (SNDL) or 22nd Century Group (XXII), should be on your radar right now.

Sundial (SNDL) is a high-risk bet

SNDL, a Canadian cannabis producer listed on the NASDAQ, is down 95% from record highs. This steep decline can be attributed to the company’s constant capital raises that diluted shareholder wealth, widening losses and revenue decline.

Earlier this year, SNDL disclosed it will lower its product portfolio and focus on high-margin items to boost its profit margins. The company is also funding other cannabis companies, thereby creating an entirely new revenue stream. In the second quarter of 2021, Sundial’s interest and investment income stood at $9.4 million which was higher than its net cannabis sales of $9.2 million.

SNDL has created a joint venture with private equity company SAF Group to identify investment opportunities in cannabis firms. SNDL has allocated $538 million to the joint venture and

infused capital in several cannabis companies including Indiva Limited, Clever Leaves, The Valens Company and Greenrose Acquisition.

Despite the steep decline of SNDL stock, the company is valued at a market cap of $1.42 billion indicating a forward price to sales multiple of 32x which is really expensive, given its top-line might decline by 12.2% year over year in 2021.

22nd Century Group (XXII) is flying under the radar

A plant biotechnology company, XXII is focused on providing technologies that can alter nicotine levels in tobacco plants, as well as cannabinoids levels in cannabis plants.

The company explains, “Our primary mission in tobacco is to reduce the harm caused by smoking by bringing our reduced nicotine content tobacco cigarettes – containing 95% less nicotine than conventional cigarettes – to adult smokers in the U.S. and international markets. Our mission in hemp/cannabis is to develop and commercialize proprietary hemp/cannabis plants with valuable cannabinoid profiles and desirable agronomic traits.”

The company’s sales are forecast to grow by 26.3% year over year to $35.5 million in 2021 and by 58.4% to $56.2 million in 2022. It shows the stock is valued at a forward price to sales multiple of 13.6x.

XXII’s products might be a game changer for companies who can then control the level of cannabinoids and nicotine, resulting in sustained long-term demand.

The final takeaway

While both the company’s remain unprofitable, XXII’s accelerating revenue growth, lower valuation and the potential to disrupt the cannabis sector makes it currently a better long-term investment than SNDL.

SNDL shares were trading at $0.70 per share on Wednesday morning, up $0.01 (+1.04%). Year-to-date, SNDL has gained 47.84%, versus a 18.11% rise in the benchmark S&P 500 index during the same period.

Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist.

More...