We're now less than three months away from the official kick-off of legal cannabis in Canada. With the passage of the Cannabis Act one month ago, Canada is set to become the first industrialized country in the world, and second overall behind Uruguay, to allow adults to purchase cannabis legally.

As you might have rightly imagined, demand for legal weed is expected to be incredibly strong out of the gate. While estimates tend to vary, giving the green light to recreational marijuana is expected to add in the neighborhood of $5 billion in annual sales to the Canadian pot industry. This comes atop what it's already generating from medical marijuana sales and via exports.

A dollar sign shadow being cast on a pile of cannabis leaves.

Image source: Getty Images.

Profit estimates for these brand-name pot stocks are tumbling

In anticipation of this spike in sales, investors have pushed marijuana stock valuations through the roof. Of course, it's not hard to understand why when we could be looking at triple-digit sales growth in each of the next two to three years for most pot stocks.

However, there comes a time when speculation ends and investors want to see tangible bottom-line results. Though a number of marijuana stocks are expected to turn a profit by fiscal 2019 or 2020 (depending on the start of their calendar year), three big-name pot stocks have recently (within the past 90 days) had their profit projections slashed by Wall Street.

Canopy Growth Corporation

The largest marijuana stock in the world by market cap is one glaring example of a company that isn't exactly in Wall Street's good graces when it comes to profitability.

Roughly three months ago, analysts expected Canopy Growth Corporation (NYSE:CGC) to generate CA$0.63 per share in full-year profits by fiscal 2020. But the current full-year estimate, as of July 15, was down to CA$0.40 per share. In fact, the six estimates available for fiscal 2020 range from a profit of CA$0.95 to a loss of $CA0.16 per share -- an exceptionally wide range suggestive of how many unknowns are associated with legalizing adult-use cannabis.

So, why the falling profit projections? My suspicion is that it's a combination of three factors.

A magnifying glass being held over a company's balance sheet.

Image source: Getty Images.

First, Canopy Growth hasn't been shy about selling common stock in order to raise capital. It recently completed a CA$600 million convertible debt offering that it plans to use to expand its product line, build up its distribution network, jump-start its branding campaign, and acquire complementary businesses. Unfortunately, each share offering balloons its outstanding share count, which can have an adverse impact on its earnings per share.  

Secondly, Canopy's management team has thrown a bit of caution to the wind when it comes to profitability. Whereas rival Aphria has placed an emphasis on profitability, Canopy's management team is approaching things as if it were the Amazon.com of the marijuana industry. By reinvesting essentially all of its operating cash flow, Canopy Growth is signaling its choice to target as much market share as possible in the early going.

Lastly, this company may not run away from the pack as was first suspected by Wall Street. As recently as 18 months ago, Canopy Growth was expected to garner 20% or more of the recreational market share, should Canada legalize. Now, it may not even be the largest producer on an annual basis as a result of aggressive acquisitions and partnerships by its peers.

It'll definitely be interesting to see if investors can look beyond Canopy's initial bottom-line struggles given its lofty market cap.

Aurora Cannabis

Another pot grower with a plunging forward per-share profit estimate is Canopy's biggest rival, Aurora Cannabis (NYSE:ACB). Three months ago, Wall Street analysts had been looking for CA$0.10 per share in fiscal 2019. Today, that estimate has dipped to just CA$0.04 per share.

A hundred dollar bill on fire.

Image source: Getty Images.

On one hand, Aurora does have exceptional top-line growth and production on its side. Currently in the process of acquiring Ontario-based MedReleaf in a $2.5 billion all-share deal, Aurora Cannabis is expected to be yielding 570,000 kilograms annually when at full capacity. That might be good enough to leapfrog Canopy Growth in terms of yearly production. 

But this positive has also turned into Aurora Cannabis's biggest negative. In order to boost its capacity so quickly, Aurora Cannabis has been on an acquisition and partnership frenzy. Between its ongoing buyout of MedReleaf, its completed purchase of CanniMed, and its numerous existing projects and partnerships, the company has had to turn to bought-deal offerings more times than I can count. By next year, it's possible we could be looking at 1 billion shares outstanding, up from just 16 million at the end of fiscal 2014. The ballooning of Aurora's share count is going to make it incredibly tough for the company to deliver a meaningful per-share profit, which is likely why Wall Street has slashed its profit forecast.

However, I wouldn't discount the possibility that Wall Street is tempering expectations as a result of uncertainties on the supply side of the equation. Though there's expected to be an initial shortage of cannabis, which is a positive for growers, the limited history we have from states like Colorado, Washington, and Oregon, to the south, shows that oversupply tends to occur within months to a few years following legalization. Perhaps analysts are playing their profit projections a bit cautious given the uncertainties associated with cannabis supply.

GW Pharmaceuticals

A final brand-name marijuana stock that's seen its bottom-line expectations tumble of late is U.K.-based cannabinoid-based drug developer GW Pharmaceuticals (NASDAQ:GWPH). Three months ago, Wall Street had been looking for a full-year loss of $4.30 per share in 2019. Today, that's ballooned to a loss of $5.14 per share. 

Why the sudden expectation of a wider per-share loss? I believe it has to do with two factors.

A cannabis leaf next to vials in a biotech lab.

Image source: GW Pharmaceuticals.

First, GW Pharmaceuticals received excellent news on June 25 when the U.S. Food and Drug Administration (FDA) announced that it was approving the company's cannabidiol-based oral drug Epidiolex as a treatment for two rare types of childhood-onset epilepsy. Of course, this seemed like something of a formality following the FDA advisory panel's unanimous recommendation for approval in April. Though the FDA isn't obligated to follow the recommendation of its panel, it does far more times than not. My suspicion is that this unanimous vote by the panel suggested the likelihood of an FDA approval by June, thusly causing what few analysts are covering the company to factor in the higher costs associated with stockpiling and marketing a new drug. 

Secondly, Wall Street may be factoring in tough competition from Zogenix (NASDAQ:ZGNX) in Dravet syndrome. Just last week, Zogenix announced positive top-line results from its second late-stage trial involving ZX008 for Dravet syndrome patients. In total, the median reduction in convulsive seizure frequency from baseline was 62.7% in the ZX008 group, compared to a meager 1.2% for the placebo patients. This data appears to strongly suggest Zogenix has a good shot at approval in Dravet syndrome which, prior to Epidiolex's approval on June 25, didn't have an FDA-approved drug. Wall Street may be accounting for this expected increase in competition. 

At this point, GW Pharmaceuticals may need to get aggressive with the pricing of its product or with label expansion opportunities if Epidiolex is going to live up to its hype.