The marijuana industry has come a very long way in a short amount of time. Back in the mid-1990s, just a quarter of respondents in Gallup's marijuana survey wanted to see the drug legalized nationally. Further, there were no countries globally that were officially giving the green light to cannabis.

But as of October 2018, two out of every three Americans now favor legalization, per Gallup, with Canada becoming the first industrialized country in the world to OK adult-use pot. In just a little over two decades, the weed industry has blossomed, and perceptions have been completely changed. What was once considered a taboo industry is now a legitimate one -- at least in Canada.

With our neighbor to the north rolling out the red carpet for cannabis, a handful of pot stocks have emerged as potential winners in the eyes of Wall Street and investors. None more so than Canopy Growth (CGC -2.43%), which is currently the world's largest marijuana stock at a valuation of nearly $17 billion.

Check out the latest Canopy Growth earnings call transcript.

Cannabis buds in a jar sitting atop a fanned pile of twenty-dollar bills.

Image source: Getty Images.

How did Canopy Growth become the largest pot stock in the world?

How does a marijuana company garner a market cap that's higher than that of American Airlines Group, Best Buy, and Chipotle Mexican Grill? First, it begins with the company's production potential. Although Canopy Growth tends to be pretty tight-lipped with its peak production potential, it has noted its intent to have 5.6 million square feet of licensed capacity. If the company were to generate around 100,000 kilograms per 1 million square feet, between 500,000 kilograms and 550,000 kilograms in peak annual production is possible. This would slot Canopy in as the second-largest grower behind Aurora Cannabis.

Second, it ties into Canopy's superior branding and sales channels. The company has what's likely the most recognizable pot brand in Canada (Tweed), and it has multiple avenues with which to reach consumers -- i.e., physical locations and online sales.

Third, it was one of the first marijuana stocks to uplist from the over-the-counter (OTC) exchange to a reputable U.S. exchange. In fact, it was the first to list on the New York Stock Exchange. Uplisting provides added visibility and improved liquidity, and it helps to further validate the marijuana business model. Just as important, it allows Wall Street firms that might otherwise be barred from investing in OTC stocks to consider coverage and/or investment in Canopy Growth.

Fourth and finally, don't overlook Constellation Brands' (STZ 0.60%) $4 billion equity investment in Canopy Growth, which closed in November. The maker of Corona and Modelo beer now holds a 37% stake in Canopy, with warrants that, if exercised, would up its stake to as much as 56%. This equity investment is just as much about the belief in cannabis's potential over the long run as it is about these two companies working together to create new products (e.g., cannabis-infused beverages).

A hand reaching for a neat stack of hundred-dollar bills in a mousetrap.

Image source: Getty Images.

Three reasons Canopy's current valuation makes little sense

While Canopy Growth clearly has a long list of catalysts that have worked in its favor, does a nearly $17 billion valuation make sense? Though my opinion is bound to be unpopular, I'd say no, it doesn't -- and there are three reasons for this view.

1. We're still early in the capacity ramp-up stage

For starters, Canopy Growth is a long ways away from generating 500,000 kilos or more a year. For instance, Aurora Cannabis, which is liable to lead the pack at 700,000 kilos per year, was only generating 100,000 kilos on an annual run-rate basis as of Dec. 31, 2018.

It's probably going to take between 12 and 24 months for most producers to complete greenhouse projects, plant their crops, get fully licensed by Health Canada for cultivation and sale, and harvest their crops. Yet investors seem content valuing the industry as if all projects will move along accordingly and every company is already producing at peak capacity.

However, we know this not to be the case. Health Canada is contending with a huge backlog in cultivation licenses and sales permits, so much so that it's played a key role in Canada's early-stage supply shortages throughout numerous provinces. These shortages not only reduce the sales potential of cannabis stocks like Canopy Growth, but they could encourage some consumers to purchase from the black market.

A cannabis leaf lying atop the carbonation of a beverage in a glass, with cannabis leaves off to the right of the glass.

Image source: Getty Images.

2. There are too many unknowns surrounding higher-margin dried-cannabis alternatives

Another problem is that there's virtually no clarity on what's going to happen with alternative consumption options, such as edibles, infused beverages, and topicals. Health Canada has suggested they'll be legalized by no later than Oct. 17, 2019, the one-year anniversary of recreational weed's legalization. But given the unique fiscal years of most marijuana stocks, which end June 30, there's a real possibility that no benefits will be seen from these higher-margin items until 2020, at the earliest.

Additionally, there are few guarantees that these high-margin items are going to have a sizable bottom-line impact. Although the thought of cannabidiol-based beverages on retail shelves could attract a broader pool of consumers, Canopy Growth and Constellation Brands are far from the only duo to think of this scenario. Around a half-dozen major beverage companies have formed a partnership with a pot stock or brought a cannabis beverage to market already (outside of Canada). This could wind up being a very crowded space, and that's never conducive to juicy margins.

A hundred-dollar bill on fire atop a lit stove burner.

Image source: Getty Images.

3. Canopy Growth is still losing a lot of money

However, the biggest red flag of all is Canopy Growth's bottom line. With marijuana now legalized in Canada, promises from pot stocks simply don't cut the mustard anymore. Wall Street and investors will want to see genuine bottom-line improvement...which Canopy Growth won't be bringing to the table for a long time.

Constellation Brands' $4 billion equity investment meant Canopy had more than $4.3 billion in cash on its balance sheet to work with. It'll be aggressively deploying this capital to acquire complementary businesses, moving into the U.S. and other foreign markets, expanding its product portfolio, and marketing its brands. None of this is going to be cheap, and the company's second-quarter operating results proved that.

In mid-November, Canopy Growth reported an operating loss of nearly 215 million Canadian dollars. Nearly CA$96 million of this was share-based compensation -- pot companies love throwing their common stock around like it's an abundant natural resource -- with sales and marketing costs more than quintupling to CA$39 million. Inclusive of one-time costs and benefits, Canopy has lost CA$421.6 million through the first six months of its fiscal 2019. Yuck! 

I don't want to go so far as to say that Canopy Growth must be profitable to prove its worth, but an operating loss of almost CA$215 million just won't cut it. Considering that Wall Street expects the company to lose money in fiscal 2020, too, it's my opinion that Canopy Growth is currently not properly valued given the uncertainties that lie ahead.