Over the past couple of years, no industry has had investors seeing green quite like the legal cannabis industry. Some of the most popular pot stocks, including Aurora Cannabis (NYSE:ACB), Canopy Growth, and Cronos Group, have advanced by a quadruple-digit percentage since the beginning of 2016, on the expectation of rapid but long-term sales growth.

Just how big could the legal weed industry become? According to various Wall Street firms, global sales could grow fourfold to sixfold by the end of the next decade, with peak sales easily topping $100 billion a year at some point in the distant future.

But as investors, we've seen these once-in-a-generation growth opportunities crop up from time to time, and what we've learned is that not every company within a fast-growing industry can be a winner. Sometimes, even the most popular stocks fail to produce as expected.

A man in a suit putting up his hands as if to say, no thanks.

Image source: Getty Images.

This Wall Street firm is wary of the most popular pot stock

Projected leading producer Aurora Cannabis is easily the most popular and polarizing pot stock of the bunch. With at least 662,000 kilos of peak annual production -- probably a conservative estimate from management -- no other company outside of Canopy Growth will be within a stone's throw of catching Aurora on aggregate output. This production, compounded with a presence in 24 countries, including Canada, is a big reason Aurora Cannabis is a favorite among millennials investors, as well as most of Wall Street.

Wall Street cheerleader Cowen Group, arguably the most bullish of all firms on the marijuana industry, rates Aurora Cannabis as its top pick in the industry. Meanwhile, Christopher Carey at Bank of America anointed a buy rating on Aurora nearly two months ago, with a price target that would give the company about 50% upside from its current levels. Jefferies analyst Owen Bennett also rates Aurora as a buy.

Generally speaking, Wall Street views Aurora Cannabis very favorably, but one firm isn't going along with the crowd.

Last week, investment bank Stifel initiated coverage on Aurora with a "hold" rating and a price target of $10 Canadian, or $7.48 U.S., which is actually a few pennies below where the company closed this past Thursday, June 6. Covering analyst W. Andrew Carter, who prefers Canopy Growth as the top industry choice, had this to say about Aurora in his note to investors: "We are cautious on Aurora in the near term given the company's reliance on the capital markets to execute upon its near-term business plans [and] the lack of a definitive strategy for entering the U.S. market, and we believe the slower development of the global medical opportunity will yield downside versus consensus estimates."

But does Stifel's analysis of Aurora Cannabis make sense? Let's take a closer look.

A cannabis leaf laid atop a one dollar bill, with George Washington's eyes peering between the leaves.

Image source: Getty Images.

Making sense of Stifel's cautious outlook on Aurora Cannabis

As someone who has a decidedly negative view on Aurora Cannabis at the moment, I was surprised to see any Wall Street firm express caution on a company that most analysts expect to be an industry leader in several aspects.

Probably what resonates most with Stifel's analysis is Aurora's "reliance on capital market to execute upon its near-term business plans." Even though recreational pot is legal in Canada, which now allows cannabis companies to seek out non-dilutive forms of financing with banks, most have chosen to issue common stock or offer convertible debentures as a means to raise capital. With Aurora making 15 acquisitions since August 2016, it's been handing out its common stock to finance deals like its candy on Halloween. In less than five years, Aurora has issued about 1 billion shares of stock, which has diluted its existing shareholders, and will make it that much more difficult for the company to deliver a meaningful per-share profit in the future. The company has also shown no evidence that it plans to stop its spending (or share issuance) spree, with a $750 million shelf offering currently at its disposal.

I have mixed feelings about Stifel's argument that "the slower development of the global medical opportunity will yield downside versus consensus estimates." On one hand, I do wholeheartedly agree that Aurora's international expansion is going to take two or three years to begin paying dividends. Only when demand in the domestic Canadian market has been met will we really see dividends from the company's external sales channels. That means the very real likelihood of Aurora losing money and/or missing Wall Street's estimates in 2019 and/or 2020.

A tipped over prescription bottle containing cannabis buds that's lying atop a doctor's prescription pad.

Image source: Getty Images.

But at the same time, I value Aurora's decision to focus on the medical marijuana community. Even though it's a smaller patient pool than the recreational side of the equation, medical patients use and buy marijuana products more frequently, and are much more likely to buy derivative products (oils, edibles, vapes, infused beverages, topicals, capsules, and so on) relative to adult-use consumers. Over the long term, it's a move designed to boost margins.

Where I don't agree with Stifel is the concern over Aurora's U.S. strategy. This concern is only meaningful if there's a chance for marijuana to be legalized in the United States in 2019, which I don't see happening. As long as Republicans retain control of the Senate, it's going to be very difficult to change its scheduling at the federal level. This makes any chance of reform before 2021, at the earliest, quite slim. Slow-stepping its U.S. entrance probably isn't a problem, given that Congress isn't exactly moving forward with cannabis reform at the federal level.

Ultimately, I agree with Stifel that caution is warranted, but I don't believe Carter and his team have fully accounted for how disruptive Aurora's share offerings have been to investors. It's for that reason that I remain decidedly bearish on Aurora Cannabis.