It’s abundantly clear that the Reddit-driven rallies in names like Sundial Growers (NASDAQ:SNDL) stock went too far.

The supposedly epic “short squeezes” promised since late January haven’t materialized. GameStop (NYSE:GME), AMC Entertainment (NYSE:AMC), SNDL stock and others remain well off their peaks.

There’s plenty of reason for skepticism toward those names going forward as well. Despite their recent big pullbacks, many Reddit favorites still are up sharply. SNDL stock, for instance, has rallied 49% so far this year.

But even skeptics have to admit that most of these companies are better off than they were before the rally. Sundial Growers is a prime example. It spent 2020 aggressively trying to fix its balance sheet. The plan was successful, but required heavy dilution of existing shareholders at unfavorable prices.

This year has been different. The huge rally of the shares in February to brief highs near $4 gave Sundial an enormous opportunity. A company that a year ago wasn’t guaranteed to survive is now flush with cash.

The question is what Sundial can do with that cash. Recent developments provide some clues — and some cause for concern.

Sundial Raises Cash

Sundial has been incredibly aggressive in selling stock since its rally began.

Between the end of 2020 and May 7, Sundial has issued 942 million shares. Its sales and warrant exercises have raised 952.1 million CAD.

The average realized price for all the company’s shares issued in 2021 is roughly 82 U.S. cents, a sharp premium to the stock price at the beginning of the year and still above the current price of SNDL stock.

So a company that closed 2020 with 60 million CAD of cash now has 753 million CAD of cash. It invested another 96 million CAD in its business in Q1, then put 188 million CAD into a joint venture that invests in cannabis companies in April.

Now shareholders have been diluted further. Sundial’s share count has a little more than doubled this year, reaching 1.86 billion shares as of May 7. But the company’s cash balance represents roughly 45% of its $1.31 billion market capitalization. Its investments, worth about $230 million, account for another 17%.

Ugly Earnings

That means its operating business is valued at over $500 million. Right now that seems very high.

Sundial’s first-quarter earnings look mixed, and its top-line total looked awful, as its sales dropped 29% quarter-over-quarter. The company’s branded revenue fell across the board; the sales of its  Top Leaf brand sank more than 50% versus Q4.

Sundial did cite “retail market conditions” as a factor in its revenue decline. Provincial boards are reducing inventory, and Sundial is looking to pull back on discounting. Still, its revenue was awfully concerning and was no doubt worse than investors had expected.

However, its bottom-line numbers improved meaningfully. Despite the weak sales, Sundial generated positive EBITDA, excluding some items, in the quarter. A bottom-line 5.6 million CAD loss in Q4 reversed to a 3.3 million CAD profit in Q1.

But its Q1 profit didn’t come from its cannabis business.

Instead, it entered the black thanks to its investments. The company booked 15.7 million CAD of income, mostly from realized and unrealized gains on its investments.

The math, as a result,  suggests that the loss from the firm’s cannabis business more than doubled QOQ and amounted to well over 100% of its net cannabis revenue.

The Outlook of SNDL Stock

Coming into 2021, I was bullish on SNDL stock. The stock’s cheap price and the progress of Sundial’s turnaround seemed to make the shares an intriguing, if high-risk, play.

With the rally since then and the company’s Q1 results,  it’s tough to maintain that stance.

Its Q1 earnings look disastrous and, again, the firm’s operating business still has a valuation of about $500 million. That seems far too high, given Sundial’s 7.2 million CAD of cannabis revenue in Q1.

And as for the company’s investments, it’s not entirely clear why Sundial management has an edge  when it comes to investing in cannabis ventures.  Also uncertain is why SNDL stock is the best vehicle through which to invest in the sector.

Sundial’s acquisition of Inner Spirit (OTCMKTS:INSHF) last week is an example of the problem with SNDL stock. Sundial is paying 131 million CAD for the Canadian cannabis retailer, representing a 55% premium to Inner Spirit’s ten-day, volume-weighted average price from the period before the deal was announced.

And there’s not much strategic value to the merger. Inner Spirit likely isn’t going to move into the U.S. or overseas. Sundial itself cited “modest synergies” from the deal, while arguing that Sundial’s “capital base” could drive Inner Spirit’s expansion.

So the deal is basically a bet that Inner Spirit stock is too cheap. Maybe the acquisition will still work. But it’s an asset play, not a merger that can create revenue or cost synergies.

In other words, it’s a symptom of a seemingly strange problem for SNDL stock: too much cash is not necessarily a good thing. Add in the weakness of its operations, and the outlook of SNDL stock appears to be worrisome.

On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.