International Cannabis Legalization And US Expansion Will Open New Markets

Key Takeaways

• International expansion and vertical integration are driving growth, with strategic acquisitions and high-margin markets enhancing SNDL's revenue and operational performance.
  
• Cost discipline, a strong balance sheet, and U.S. market readiness support continued investment, M&A, and resilience against industry volatility.
  
• Heavy investment and strategic expansion expose SNDL to margin pressure, liquidity risks, and uncertain U.S. market entry, challenging its long-term profitability and growth ambitions.

Catalysts

Engages in the production, distribution, and sale of cannabis products for the adult-use market in Canada.

• Strong international growth initiatives, supported by significant working capital investments and the ramp-up of the Atholville cultivation facility, position SNDL to capitalize on expanding global acceptance and legalization of cannabis, particularly in high-margin European export markets, which can drive future revenue and margin expansion.
  
• Outperformance of SNDL's cannabis operations relative to broader Canadian market growth, coupled with a return to revenue growth in retail alcohol and strategic acquisitions like Indiva and 1CM, reflect the company's ability to capture value through vertical integration and scale, supporting sustained revenue and EBITDA growth.
  
• Disciplined cost control, ongoing productivity improvements, and realized synergies from recent acquisitions have resulted in record gross margins and the first-ever positive operating income in company history, setting a foundation for further improvements in net margins and bottom-line earnings.
  
• SNDL's strong cash position and debt-free balance sheet enable opportunistic M&A activity, organic expansion of its retail network, and continued investment in high-return projects, ensuring resilience and the ability to drive top-line and earnings growth even during industry volatility.
  
• Exposure to future U.S. market opportunities through asset holdings and creditor rights in major U.S. operations prepares SNDL to benefit from potential regulatory easing or federal legalization, representing a significant potential catalyst for revenue and earnings growth.

SNDL Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming SNDL's revenue will grow by 4.6% annually over the next 3 years.
• Analysts are not forecasting that SNDL will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate SNDL's profit margin will increase from -10.4% to the average US Pharmaceuticals industry of 20.6% in 3 years.
• If SNDL's profit margin were to converge on the industry average, you could expect earnings to reach CA$221.9 million (and earnings per share of CA$0.94) by about August 2028, up from CA$-98.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.9x on those 2028 earnings, up from -6.0x today. This future PE is lower than the current PE for the US Pharmaceuticals industry at 18.1x.
• Analysts expect the number of shares outstanding to decline by 2.92% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.45%, as per the Simply Wall St company report.

SNDL Future Earnings Per Share Growth

Risks

• SNDL's continued negative free cash flow, despite positive operating income, is being driven by significant working capital investments and capital expenditures to support international expansion and new store openings; if growth fails to materialize as planned, these investments could weigh on cash reserves, eventually impacting earnings sustainability and net margins.
  
• While SNDL highlights "extremely high" international cannabis margins in emerging markets, management acknowledges volatility and expects pressure on these margins as competition, regulatory clarity, and local supply increase; this could result in long-term gross margin compression and less accretive revenue growth from international operations.
  
• The Liquor Retail segment's return to top-line growth was modest and attributed in part to favorable holiday timing and strong private label performance; persistent secular declines in alcohol consumption or changing consumer preferences toward alternative beverages could pressure this segment's revenue and overall consolidated margins in future periods.
  
• SNDL's Canadian cannabis market share remains low (about 2% and ranked #12), and management prioritizes "profitable growth" over aggressive share gains amid ongoing industry consolidation; failure to scale into a top-tier player may limit SNDL's ability to achieve meaningful operating leverage and could constrain long-term revenue growth.
  
• SNDL's anticipated U.S. expansion through assets held in SunStream faces prolonged legal, regulatory, and operational uncertainties-including unresolved litigations and an inability to directly manage U.S. plant-touching operations due to federal law; delays or unfavorable outcomes in these processes could hinder entry into the lucrative U.S. market, impacting future revenue catalysts and long-term earnings potential.

Valuation

• The analysts have a consensus price target of $4.495 for SNDL based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$1.1 billion, earnings will come to CA$221.9 million, and it would be trading on a PE ratio of 7.9x, assuming you use a discount rate of 6.4%.
  
• Given the current share price of $1.67, the analyst price target of $4.49 is 62.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.