SNDL Will Soon Pass a Big Milestone, But Is the Stock a Buy?

SNDL (NASDAQ: SNDL) will soon achieve something that it's been working on for years. Once it accomplishes its goal, it'll be the start of a new era for the company where growth will likely be faster.

But does that make the stock a buy? Probably not for everyone, but for some investors, the answer will be an emphatic affirmative. Let's take a look at what the company will do in the next few quarters and why it matters.

This process has been in the works for a long time

The SNDL of the near future will be the culmination of a long process that coincided with its share price falling by 70% during the past three years. In short, its consistent inching toward profitability is nearly complete.

The journey hasn't been an easy one for shareholders, but it's important to recognize that SNDL is a much more potent and far more diversified business than it was in the past. Whereas before it was a cannabis company focused solely on competing in Canada, it now also has a liquor retailing segment that brought in 140 million Canadian dollars ($100 million) in the second quarter. For reference, its cannabis retail segment only reported CAD$76 million in sales.

Its trek toward profitability is all the more remarkable considering its significant use of acquisitions, like it did to develop its liquor business. Furthermore, thanks to its SunStream Bancorp cannabis investment banking wing, it now has credit interests in a handful of U.S.-based cannabis companies across five states.

When U.S. cannabis legalization occurs, if it ever does, SNDL will be able to convert many of its arrangements into equity stakes in U.S. multi-state operators (MSOs), giving it exposure to the huge market as it opens. Even if legalization takes much longer than anticipated, or if it doesn't happen at all, SNDL still gets interest payments from its debtors.

As of Q2, SNDL's cash outflow was just CAD$6 million. A year earlier it had a loss of CAD$27.8 million. The odds are very good that it will soon start to report free cash flow (FCF) , and that's a big milestone. Though it's still a number of years away at best, it's now possible to see a future where the business performs share buybacks and pays out dividends to shareholders.

Between its expansion plans and its recent announcement of a new cost-cutting campaign that's expected to save as much as CAD$20 million on an annual basis starting in the third quarter and concluding in mid-2025, SNDL will be in the enviable position of potentially increasing its bottom-line growth.

It may not pay to wait until gains occur

At the moment, SNDL's valuation does not reflect its transition to profitability. Its price-to-book (P/B) ratio is just 0.6. That effectively suggests that the market is valuing its assets at much less than the historical cost that the company recorded on its books. Such assumptions are typically appropriate for deeply unprofitable or highly indebted companies, as the expectation is that they'll destroy shareholder value rather than generate it via their operations.

But that model no longer fits SNDL. It has CAD$183 million in unrestricted cash, and no debt, though it does have a manageable and relatively small sum of capital lease obligations. While its year-over-year revenue growth is uninspiring, down 1.6% in Q2, that could change quickly in the event of legalization.

In contrast, building a competitive advantage in the branding of its marijuana products will be a long-term project that could slowly contribute to earnings growth, even if revenue growth is harder to come by. And, thanks to the fact that it purchased its alcohol segment, much of the work in building customer loyalty via branding is already well underway, if not completed. So its margins there should be defensible.

Buying SNDL stock right now is a safer bet than it has been at any point in the recent past.

It isn't the right pick for investors seeking rapid growth in the near term, but it's a decent pick for those concerned with getting a good value for their money. As long as consistent execution of its core business model and steady efficiency improvements continue, shareholders likely have a lot to look forward to.

Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool recommends SNDL. The Motley Fool has a disclosure policy .