Although marijuana stocks delivered a subpar year in 2018, the cannabis movement as a whole didn't disappoint. Our neighbor to the north, Canada, wound up legalizing recreational marijuana, thereby ending nine decades of prohibition and opening the curtain to billions of dollars in added annual sales. More importantly, it signified to the world that cannabis was no longer a taboo topic. Rather, it's a legitimate industry where investors have an opportunity to make money.

Just how big could the cannabis industry be? Cowen & Co. has called for $75 billion in annual sales by 2030. Meanwhile, an analysis from Arcview Market Research and BDS Analytics is calling for 38% global sales growth to $16.9 billion in 2019, with sales topping $31 billion by 2022. That's a lot of dollars that need to find a home. The question is: Does this mean marijuana stocks will be profitable?

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Uh-oh! Pot stock profit projections are falling

Over the past couple of years, investors have had a pretty much insatiable appetite for fast-growing marijuana stocks. But Wall Street has dampened that mood a bit in recent months. A quick screen of Wall Street's consensus full-year earnings-per-share (EPS) estimates for 2020 show that most pot stocks have had their profit projections fall over the past 90 days. For reference, legal recreational sales began in Canada a little over 100 days ago.

Here's a glimpse of how marijuana stock EPS projections have deteriorated from 90 days ago through today. Keep in mind, all estimates are in Canadian dollars.

Table by author. Data source: Yahoo! Finance. FY = full-year. Data as of Jan. 23, 2019. 

As you can see, this deterioration in consensus profit is particularly noticeable for Canopy Growth, which has seen its profit forecast nearly cut by three quarters over the past three months. Smaller but nonetheless notable declines can be seen from the likes of Aurora Cannabis and Tilray. In other words, the stock market's largest pot stocks by market cap are the ones taking it on the chin.

What the heck is going on, you ask? My suspicion is that it boils down to four factors.

1. Analysts have no precedence to lean on

For starters, I don't think analysts really have a clue what to expect from marijuana stocks, and are therefore quite liquid with their profit projections. Take Tilray as a good example. Although it's forged some solid joint ventures with Novartis and Anheuser-Busch InBev and the company has well-known medical cannabis brands, Wall Street doesn't really have a clue where the peak growing potential lies for Tilray over the next one to three years.

In June, before Tilray went public, it filed its S-1 prospectus with the U.S. Securities and Exchange Commission. The filing estimated that 912,000 square feet of facilities would be complete by year's end, with a little over 850,000 square feet in growing capacity. But Tilray has close to 3 million square feet in undeveloped land. How much of this will be devoted to capacity expansion? Your guess is as good as Wall Street's right now.

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2. Laying the groundwork costs a lot of money

Secondly, marijuana growers aren't going to simply snap their fingers and have their entire supply chain and sales channels fall into place. Laying the foundation for long-term success is very expensive, and it'll likely mean years of major expenses for top-tier pot stocks like Canopy Growth.

Even with Canopy expected to lead the way on the revenue front, or at worst lock up the No. 2 spot behind Aurora Cannabis, it's going to be spending liberally on acquisitions, capacity expansion, its international push, marketing and branding, and product development. The amount that Canopy's management will spend each quarter is simply proving unpredictable.

What has proven predictable are its huge losses. In the company's most recent quarter, Canopy Growth lost almost CA$215 million on an operating basis, suggesting that these losses are likely to continue for many quarters to come.

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3. Regulatory red tape is a problem

Third, falling profit estimates could be blamed on regulatory red tape.

When Canada legalized recreational weed in October, regulators reassured the public that there would be more than enough supply to meet demand. In some provinces, it took just hours to prove that thesis incorrect. Nearly all of Canada's provinces have suffered from temporary supply shortages, with a few suggesting that it could be months before supply is sufficient to meet demand. The culprit is likely Health Canada.

The regulatory agency responsible for overseeing the Canadian pot industry has a backlog of cultivation licenses and sales permits that are taking many months to approve. As a result, supply shortages are reducing the sales potential of some cannabis growers, and it may be driving a small percentage of consumers back to the black market.

Image source: Getty Images.

4. Share-based dilution takes its toll

As much as you're probably sick and tired of hearing me talk about share-based dilution, it's become a real problem, and it's likely weighing on the profit estimates of pot stocks.

Since banks have been most reluctant to lend to marijuana stocks on a nondilutive basis, most pot stocks have turned to bought-deal offerings to raise capital. This involves selling stock, convertible debentures, stock options, and/or warrants in order to raise cash. While successful, these offerings have a downside of ballooning a company's outstanding share count. This weighs on the price of a stock, as well as pushes EPS down for profitable companies.

Aurora Cannabis, the king of share-based dilution, has seen its share count rocket from 16 million at the end of fiscal 2014 to nearly 962 million as of Aurora's most recent quarter. Even with improved net income and margins, Aurora could actually see its EPS decline as a result of dilution.

Long story short, it's time for investors to once again consider toning down their expectations for marijuana stocks in the near term.

Check out the latest Canopy Growth and Tilray earnings call transcripts.