SNDL (SNDL 6.48%) has undergone a name change (formerly known as Sundial Growers) and multiple acquisitions over the past year and a half. Unable to rely on its organic growth, the cannabis producer has expanded its reach into the alcohol industry and now also operates retail pot stores across Canada.

The company recently released its quarterly earnings numbers, which showed a huge increase in sales. Has SNDL turned a corner and become a better buy, or is it still too risky of a stock for investors to buy?

Sales from acquisitions accounted for 95% of revenue

SNDL’s second-quarter revenue totaled C$223.7 million for the period ending June 30. This represents a year-over-year growth rate of 2,344%. That’s an impressive amount, the kind of growth rate I haven’t seen since the early stages of legalization in Canada, when new recreational sales were making all pot stocks look like growth machines.

However, these numbers are a bit misleading. The vast majority of the company’s revenue this past quarter was due to its recent acquisitions. SNDL closed the Alcanna acquisition on March 31, and it marked the first full quarter that the alcohol business was included in the cannabis company’s results. Sales from spirits totaled CA$148.6 million and accounted for two-thirds of SNDL’s top line. Cannabis retail sales were due to Nova Cannabis (acquired through the Alcanna deal) and Spiritleaf, which SNDL acquired in July 2021. Revenues from that segment totaled CA$63.5 million, or 28% of sales.

That leaves only CA$11.6 million from cannabis cultivation and production (5% of sales), the business SNDL had before these deals. A year ago, revenue from that segment totaled just CA$9.2 million. While the company experienced a significant increase in sales in the second quarter, it was because these acquisitions were not contributing to SNDL’s business in the year-ago period.

SNDL remains unprofitable and is still burning through cash

What should be important to investors is how well SNDL is integrating these businesses and what its cash and bottom line looks like. Unfortunately, these numbers don’t look great. In the second quarter, the company posted a net loss of CA$74 million, which is 41% higher than the CA$52.3 million loss it posted in the year-ago period.

From a cash perspective, the business is still burning cash, recording an outflow of CA$17.9 million from its operating activities over the past three months. That’s an improvement from the CA$70.4 million cash burn it reported a year ago, but the year-ago period’s numbers also look worse because of nearly CA$70 million worth of marketable securities additions ; this is not an exit that should worry investors, as tradable securities are fairly liquid assets.

Although the company should find room to shed some redundancies from these acquisitions and improve its cost structure and cash flow, SNDL has a lot of work to do, and investors should not assume that more deals will do the best business.

Business is different, but not better

SNDL has certainly changed its business, but this is not a turnaround and it is not a better investment. Adding complexity and businesses that may not be so complementary to each other (eg alcohol and cannabis) is not something that can add value in the long run. Companies often set up spinoffs for the sake of focusing on core competencies and being leaner and more efficient. SNDL is doing the opposite, all for the sake of increasing its top line. This week, the company announced another all-stock deal to buy a cannabis company Valence.

Investors should avoid SNDL. The company is following a risky path that appears to be a growth-at-any-cost strategy, which will likely lead to more dilution, and the business won’t necessarily be better off in the long run.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends The Valens Company Inc. The Motley Fool has a disclosure policy.

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