Over the past year, marijuana stocks have been practically unstoppable -- and for good reason.

For starters, the dollar figures behind the legal cannabis industry are scorching hot. North American legal pot sales grew by 34% in 2016 to $6.9 billion, and according to Arcview, they could continue growing by between 25% and 30% annually through 2021. Investment firm Cowen & Co. is looking for growth to top 23% annually, resulting in $50 billion in legal sales by 2026.

The public's opinion of marijuana has shifted dramatically, too. In 1995, the year prior to California becoming the first state to legalize medical cannabis for compassionate use, only 25% of those surveyed by Gallup supported the idea of national legalization of marijuana. Last year, support jumped to 60%, an all-time high. As the public and lawmakers soften their stance on cannabis, the door opens just a bit wider for the businesses and investors waiting in the wings.

A cannabis plant growing in an outdoor grow farm with a sunrise in the background.

Image source: Getty Images.

Marijuana stocks are growing like gangbusters

Some of the biggest gains among marijuana stocks have been seen in those developing cannabinoid-based or cannabis-related drugs. Here's just a short list of how well these companies have performed recently:

  • GW Pharmaceuticals (GWPH): up 1,187% over the past four years.
  • Cara Therapeutics (CARA 5.24%): up 175% over the past year.
  • Corbus Pharmaceuticals (CRBP 3.77%): up 204% over the past year.
  • AXIM Biotechnologies (AXIM 13.55%): up 4,267% over the past year.
  • Zynerba Pharmaceuticals (ZYNE): up 120% over the past year.

You'll note the magnitude of some of these moves. GW Pharmaceuticals, which is the premier marijuana stock with a leading $3 billion market cap, has gained nearly 1,200% in four years. The smaller AXIM Biotechnologies, which has an entirely clinical-stage pipeline, is up almost 4,300% in a year! These are mouthwatering returns for investors.

But they also come with a big fundamental catch.

Is your marijuana investment going to go up in smoke?

Though some of the top performers have been cannabinoid-based drug developers, they're also among the companies losing the most money on an annual basis. Here's how the five aforementioned companies performed on an operating basis in their most recent fiscal year:

  • GW Pharmaceuticals lost $82.2 million.
  • Cara Therapeutics lost $57.3 million.
  • Corbus Pharmaceuticals lost $20 million.
  • AXIM Biotechnologies lost $10.1 million.
  • Zynerba Pharmaceuticals lost $23.3 million. 
A hundred dollar bill burning up, implying large investment losses may be coming.

Image source: Getty Images.

Add that up and you get a cumulative loss (when rounded) of $193 million. All the while, the valuations of these marijuana stocks are rising through the roof. In reality, these companies have a lot to prove to earn their current valuations.

GW Pharmaceuticals

GW Pharmaceuticals may be the kingpin of marijuana stocks, but it still needs to demonstrate to Wall Street that it can get Epidiolex approved by the Food and Drug Administration (FDA), and successfully price and launch its experimental childhood-onset epilepsy drug. In pivotal phase 3 trials, Epidiolex shone by meeting its primary endpoints, so at least there's minimal evidence to suggest the FDA won't approve it as a treatment for Dravet syndrome and Lennox Gastaut syndrome.

Nonetheless, GW Pharmaceuticals isn't expected to generate recurring profits until 2020, and it burned through more than $125 million in cash from operations last year. Its cash burn should remain high as it hires an internal marketing team for Epidiolex and works to expand the remainder of its pipeline. Is it worth $3 billion? That remains to be seen. 

Cara Therapeutics

Cara Therapeutics is a bit of an anomaly on this list of marijuana drug developers in that its pipeline isn't entirely devoted to cannabinoids. CR701, a CB receptor agonist, is the only experimental cannabinoid drug in its pipeline, and thus far it's demonstrated early signs of efficacy on animals in preclinical trials. There's no timetable set when this drug might work its way into clinical studies as a possible opioid replacement.

The bulk of this "marijuana" stock's hope lies with CR845, a kappa opioid receptor agonist that's designed to treat pain and pruritus (the official team for itching), and it has zilch do to with marijuana. While CR845 has demonstrated midstage efficacy in pruritus, it's the pain indication that'll hold most of the weight since it's a much larger patient pool. Cara's future is thusly still very uncertain. 

A doctor holding a bag of cannabis buds in one hand and cannabis infused pills in the other.

Image source: Getty Images.

Corbus Pharmaceuticals

One of the biggest risks for Corbus Pharmaceuticals is that its entire pipeline is dependent on just a single compound, anabasum, which is a synthetic oral endocannabinoid-mimetic drug. Though anabasum is being tested in four indications, relying on a single drug is a risky proposition when clinical success rates are already working against drug developers.

The good news for shareholders is that midstage cystic fibrosis and systemic sclerosis data has been positive, but there are still few guarantees that anabasum will succeed in phase three trials, or that Corbus will be generating a profit any time within the next five years. With $39.4 million in cash on hand as of March 2, following its registered direct financing, Corbus is also likely to need multiple cash infusions in the years to come.

AXIM Biotechnologies

AXIM Biotechnologies has a monstrously long pipeline comprised of its chewing gum, topical application, capsule release, and even suppository delivery mechanism. Yet the vast majority of AXIM's 14 listed or planned studies are either preclinical or phase 1 dose-finding studies. In short, proof of concept has yet to be firmly established with any of AXIM's major clinical swings.

AXIM's balance sheet is just as terrifying, with minimal cash on hand and negative working capital of $3 million as of the end of September. With essentially no clue if AXIM's drugs are going to perform as expected and the chance of recurring revenue still years off, AXIM could be the biggest gamble of all on this list.

Piggy banks with progressively smaller cannabis plants growing out of them, representing pot businesses declining cash balances.

Image source: Getty Images.

Zynerba Pharmaceuticals

Finally, Zynerba Pharmaceuticals offers two intriguing cannabinoid products – ZYN001, a THC pro-drug patch, and ZYN002, a cannabidiol-based gel that absorbs into the skin. The problem is that ZYN001 is only now getting ready to begin clinical trials, pushing its possibility of revenue generation for fibromyalgia or peripheral neuropathic pain out probably four years, if not more. This means Zynerba's valuation essentially rests with midstage data for ZYN002 expected this summer in its osteoarthritis and Fragile X syndrome trials.

Like Corbus, Zynerba recently completed a share offering, which in its case raised $54.3 million after commission and expenses. Added to the $31 million it ended 2016 with, Zynerba looks as if it has ample cash in the interim. However, if ZYN002 progresses into phase 3 trials, and with ZYN001 about to move into clinical-stage studies, Zynerba is likely going to need financing at some point before the decade is up.

Long story short, these marijuana gains could just as easily go up in smoke if there are no signs of fundamental improvement in the years to come. With success seemingly baked into the valuations of these marijuana stocks, investors should consider investing at their own risk.