In case you haven't noticed, marijuana stocks are going bonkers, once again. After logging an abysmal fourth quarter, pot stocks have been blazing hot since 2019 began. Through Monday's close (April 29), the first-ever cannabis exchange-traded fund, the Horizons Marijuana Life Sciences ETF, had tripled the return of the broad-based S&P 500 (52.8% vs. 17.4%), which is having its own year to remember.

As of this past weekend, 14 marijuana stocks had vaulted themselves into billion-dollar market caps, with OrganiGram Holdings, which was $3 million shy as of this past weekend, handily surpassing the $1 billion mark on Monday to become No. 15. The marijuana industry is now big business, and both Wall Street and investors have recognized it.

A person holding a magnifying glass over a potted cannabis plant.

Image source: Getty Images.

However, just because the cannabis industry has pie-in-the-sky revenue and profit potential, it doesn't make all of these billion-dollar pot stocks default winners. In fact, 3 out of 4 of the largest marijuana stocks by market cap arguably have the most to prove to Wall Street.

Cronos Group

Perhaps no company causes me to scratch my head in disbelief more than Cronos Group (CRON -1.66%), the third-largest pot stock by market cap, at $5.7 billion.

On one hand, Cronos Group secured $1.8 billion in much-needed capital when tobacco giant Altria agreed to invest in the company this past December. The equity stake, which closed in March, gave Altria a 45% non-diluted equity stake in the company, with the option to exercise warrants that it also received to up its stake to 55% at some point in the future. This investment provided Cronos with a healthy downside buffer, as well as significantly bolstered a cash position that stood at less than $25 million at the end of its fourth-quarter report.

Cronos also landed what should be a lucrative deal with Ginkgo Bioworks in September. For the cool sum of $100 million, Cronos will gain access to Ginkgo's microorganism platform to develop yeast strains capable of producing targeted cannabinoids at commercial scale. Since cannabis derivatives are a much higher-margin product than traditional dried cannabis, this should, presumably, help Cronos in the profit department.

But the big issue with Cronos Group is that if you strip away its cash value, it has all the hallmarks of a middling to below-average producer. If blood were squeezed out of the turnip, so to speak, it might hit 120,000 kilos of peak production, which may only be good enough for a fringe top-10 spot in Canada in terms of peak yield.

A person holding cannabis leaves in front of a globe of the Earth.

Image source: Getty Images.

Another concern is that the company has done very little in terms of expanding to foreign markets. Aside from a modest production presence in Australia and Israel and distribution deals in Germany and Poland, Cronos notably lags its billion-dollar peers in overseas appeal. Without ample international sales channels, Cronos runs the risk of being steamrolled by dried cannabis oversupply and commoditization within the next two to four years.

And don't even get me started on profitability after the company delivered a measly $4.2 million in fourth-quarter sales (the first post-recreational weed legalization quarter in Canada). With its ballooned share count following the Altria equity deal, Cronos will be lucky to get its forward price-to-earnings ratio down below 100 before 2022. Suffice it to say, it has a lot to prove to Wall Street and investors.

Aurora Cannabis

The second-largest marijuana stock in the world by market cap, Aurora Cannabis (ACB -1.15%), also needs to do quite a bit to live up to the ridiculous amount of hype currently surrounding it.

A favorite among millennial investors, Aurora Cannabis has built itself quite the marijuana empire in the early going. It's currently expected to lead all growers in peak annual output, and I see close to 780,000 kilos by 2022. Aurora also has a bigger global presence than any other marijuana stock, with representation (either production or distribution) in 24 countries, including Canada. Just as Cronos could struggle to offload its production within a few years, Aurora should thrive as a result of its efforts to expand overseas.

Yet plenty of questions remain. Perhaps chief among them is whether or not Aurora Cannabis will be able to recoup the absurd premiums it paid to acquire MedReleaf for $2 billion, CanniMed Therapeutics for $852 million, or ICC Labs for around $200 million. At the end of its fiscal second quarter, Aurora was lugging around a ghastly 3.06 billion Canadian dollars in goodwill and another CA$689 million in intangible assets. This works out to 63% of its total assets tied up in goodwill and an aggregate of 77% of its total assets deriving from goodwill plus intangible assets. That's a lot of hope built into the underlying value of Aurora Cannabis, and it could represent a massive writedown in the future.

A frustrated stock investor grasping his head while looking at losses on his computer screen.

Image source: Getty Images.

In order to construct its marijuana empire, Aurora Cannabis has also had to raise a lot of money. Part of this capital came from bought-deal offerings, where common stock or convertible debentures were sold.

But the vast majority of its capital raises have involved using its common stock as collateral to fund acquisitions. Nearly all of Aurora's buyouts have been all-stock deals, which is the reason its share count has grown by more than 1 billion shares in about 4.5 years. Sure, Aurora has gained plenty of market cap over that time, but shareholders have suffered. In addition, this rapid increase in share count will make it difficult for Aurora Cannabis to generate meaningful earnings per share, which could scare off value investors.

At this point, even with recurring positive EBITDA (earnings before interest, taxes, depreciation, and amortization) forecast by the fiscal fourth quarter (April 2019 – June 2019), profitability doesn't look to be a given until 2021, at the earliest.

GW Pharmaceuticals

The fourth-largest marijuana stock in the world by market cap, GW Pharmaceuticals (GWPH), also has quite the challenge ahead of it if it's to live up to the hype.

The big news for GW Pharmaceuticals is that it became the first cannabinoid-based drug developer to have the U.S. Food and Drug Administration (FDA) approve a cannabis-derived drug in June. Epidiolex, an oral cannabidiol-based solution, wound up reducing seizure frequency from baseline by between 30% and 40% in multiple late-stage studies for patients with two rare types of childhood-onset epilepsy (Dravet syndrome and Lennox-Gastaut syndrome). Right now, Epidiolex is the only therapy approved by the FDA to treat Dravet syndrome, presumably creating a clear runway for GW Pharmaceuticals' lead drug to shine.

A vial of Epidiolex next to its packaging and two droppers.

Image source: GW Pharmaceuticals.

But here's the thing: After being launched on Nov. 1, 2018, Epidiolex only managed $4.7 million in net sales. That's peanuts for the only approved treatment for Dravet syndrome that's being priced at $32,500 wholesale and supposedly has plenty of insurer coverage. With a market cap of close to $5.3 billion, GW Pharmaceuticals is being priced as if Epidiolex will grow into a $1 billion-a-year drug. While two months will not make or break this launch, $4.7 million really isn't impressive in the least over two full months. 

GW Pharmaceuticals' product portfolio and pipeline haven't exactly done much for the company beyond Epidiolex. Sativex, which is approved in more than a dozen European countries as a treatment for spasticity related to multiple sclerosis, has been an abysmal disappointment in the sales department, while phase 3 trials in the U.S. of Sativex for cancer pain flopped. Additionally, GW reported in February 2018 that its cannabidivarin-based experimental compound GWP42006 did not meet its primary endpoint in a phase 2a proof-of-concept study in patients with focal seizures. 

Unless physicians and patients start buying Epidiolex in bulk, it could be difficult for GW Pharmaceuticals to match its hype.