In case you haven't noticed, the marijuana industry is absolutely on fire. Last year, we witnessed history made more than a dozen times, with highlights including the legalization of recreational pot in Canada, the passage of the Farm Bill in the U.S., and the first-ever cannabis-derived drug getting the green light from the U.S. Food and Drug Administration.

Not surprisingly, we've seen pot stocks blazing quite the trail thus far in 2019. The first-ever marijuana exchange-traded fund, the Horizons Marijuana Life Sciences ETF, is up 54% year to date through this past weekend. Meanwhile, the largest publicly traded marijuana stock in the world, Canopy Growth (NYSE:CGC), is higher by 66% through this past weekend.

Check out the latest Canopy Growth earnings call transcript.

A tipped-over clear jar packed with cannabis buds that's lying atop a small pile of cash bills.

Image source: Getty Images.

Although Canopy Growth has clearly done a lot right to earn itself a $15.2 billion market cap, yours truly has serious reservations about its valuation, even with clear competitive advantages. But just because I see Canopy Growth heading lower, it doesn't mean there isn't a price at which I don't consider it worth buying. Before I divulge the price point where I believe Canopy Growth becomes an attractive investment opportunity, let me walk you through my thinking on the buy and sell sides of things.

The Canopy Growth buy thesis

When deciding on a fair valuation for Canopy Growth, you first have to account for the company's top-tier production. With the exception of Aurora Cannabis, no other Canadian grower is expected to produce more marijuana on an annual basis at peak production. Canopy Growth already has more than 4.3 million square feet of licensed growing space and is on track to have all 5.6 million square feet devoted to growing weed licensed sometime this year. Although the company has been tight-lipped on its peak yield, my suspicion is it'll land between 500,000 kilograms and 550,000 kilograms per year.

Even though production isn't everything, it's still pretty darn important. As of Sept. 30, 2018, Canopy Growth already had 70,000 kilos of annual production spoken for by Canadian provinces, and it had a presence in more than a dozen foreign countries. This international expansion will be particularly important in about two years when domestic cannabis yield outpaces demand and growers need to look overseas to find buyers for their excess production.

Consideration also needs to be paid to Canopy's cash hoard, which stood at nearly 5 billion Canadian dollars (close to $3.8 billion U.S.), inclusive of marketable securities, at the end of its fiscal third quarter. Much of this capital was derived from a $4 billion equity investment from Constellation Brands (NYSE:STZ) that closed in November. This was the third such investment from Constellation, and it gives the Modelo and Corona beer maker a 37% equity stake in Canopy. Having so much cash on hand means Canopy Growth can continue to make complementary acquisitions and execute on its long-term strategy without the need to raise additional funds.

A tipped-over white bottle containing softgel capsules, with a small pile of softgel capsules next to the bottle.

Image source: Getty Images.

Lastly, there are a number of intangibles to consider, including its multiple sales channels, its superior branding, and the company's push into higher-margin cannabis alternatives. Canopy Growth has successfully launched a line of softgel oil-filled capsules, will almost certainly collaborate with Constellation Brands to develop cannabis-infused beverages, and recently was awarded a production and processing license for hemp in New York State. Canopy is at the leading edge of innovation in numerous aspects of the cannabis and hemp industries, and for that reason, it does deserve the highest market cap of its peers.

Clear reservations with the largest pot stock in the world

Then again, a $15.2 billion valuation doesn't quite seem appropriate for a number of reasons.

First and foremost, Canopy Growth may have a lot of cash, but it's going to be spending a lot of this capital on its international infrastructure, branding, marketing, product research, and acquisitions over the next couple of years. This means there's a very good chance the company will lose a lot of money in fiscal 2019 and 2020. Through the first nine months of fiscal 2019, Canopy Growth has lost almost $307 million (CA$406.2 million), with Wall Street predicting another loss (albeit much smaller) next year. It's difficult to support a $15 billion valuation when investors might have to wait until 2021 to get recurring profitability on an operating basis.

Separately, but to add to the above point, share-based dilution has been a problem for Canopy Growth. Sure, it picked up $4 billion in cash from Constellation Brands, but only after it issued common stock and warrants to make the deal happen. On a year-over-year basis, Canopy's outstanding share count is up 75%, and with 107.9 million warrants outstanding, as well as 31.6 million stock options, there's a good likelihood of a much higher outstanding share count in the future. This can weigh on existing shareholders as well as lower earnings per share.

A magnifying glass being held over a balance sheet.

Image source: Getty Images.

Canopy Growth's acquisition strategy also comes into question. When buying another company, it's not uncommon for the purchasing company to pay a premium above and beyond tangible assets. This premium is known as "goodwill." In Canopy Growth's case, it ended the quarter with $1.39 billion (CA$1.82 billion) in goodwill, which trails only Aurora Cannabis in terms of aggregate goodwill on its balance sheet. Thanks to its large cash balance, goodwill only represents 21% of total assets. Still, it could be difficult for Canopy to recoup this premium through intangibles and cost synergies, meaning substantial future writedowns may await.

Lastly, Canopy Growth is really focusing on recreational pot consumers. On the bright side, this gives the company the largest possible consumer pool, relative to medical marijuana patients. However, adult-use consumers tend to buy dried cannabis flower far more than higher-margin alternative products, such as oils. Since dried cannabis flower is susceptible to per-gram price declines over time, Canopy Growth's margins could be a lot shakier than investors realize.

Here's the price at which Canopy Growth becomes attractive

Taking both sides of the argument into account, I do see value in Canopy Growth's stock -- just not at $44 a share. Rather, I would argue that Canopy becomes an attractive investment in the $25-to-$27 area, or about 40% lower than where the company is currently trading.

Why $25 to $27 and not any other random numbers? On the positive side, I'm factoring in that about 25% of the company's current valuation is cash and marketable securities. I'm also counting on Canopy being able to maintain its competitive advantages with regard to branding and marketing. Other factors I'm accounting for include rapid sales growth, its Constellation partnership, and the possibility that Constellation could choose to acquire Canopy Growth outright by perhaps 2022 or 2023, when it has the financial capacity on its balance sheet to do so.

Two red dice, with the words buy and sell stamped on them, being rolled atop a piece of paper that has financial figures typed on it.

Image source: Getty Images.

On the negative side of the equation, I'm counting on Canopy Growth to lose money through fiscal 2020, to burn through some of its cash on hand, and to see the average price per gram of what it sells deteriorate at a faster pace than its per-gram production costs will fall due to economies of scale. Coupled with ongoing share-based dilution, caution appears warranted.

With a little over $1 per share in cash flow projected by Wall Street for fiscal 2021, my personal expectation is for Canopy Growth to deliver about $0.50 in EPS for its first operating profit (in 2021). With sales growth likely to have tapered to around 50% to 55% annually by 2021, a share price of $25 to $27 would yield a PEG ratio of around 1. Keep in mind that long-term growth estimates (and thus PEG ratios) don't yet exist for pot stocks, so this is my personal estimate. At roughly 50 to 60 times forward earnings for 2021, and the company's noted competitive advantages, I'd consider Canopy Growth an attractive stock worth buying.