Few industries are hotter right now than marijuana. According to analytics firm New Frontier Data, weed sales in the U.S., the largest cannabis market in the world, could triple to as much as $41.5 billion by 2025.

We're also beginning to see signs of the Canadian pot industry maturing. Provinces that had struggled to approve dispensary licenses are finally moving past these initial hurdles, while licensed producers are bringing their output and costs in-line with prevailing domestic demand.

There's even speculation that the U.S. could legalize marijuana at the federal level. Support for cannabis legalization is substantially higher among Democrats than Republicans, and Democrats now control Congress by the slimmest of majorities. This has investors piling into marijuana stocks big and small.

A handful of cannabis buds lying atop a messy pile of cash.

Image source: Getty Images.

Sundial Growers has quickly become a favorite among retail investors

Arguably the most popular pot stock of the bunch is Canadian licensed producer Sundial Growers (SNDL -3.38%). On online investing app Robinhood, Sundial is the fourth most-held stock, and it has been as high as No. 3, behind only Apple and Tesla Motors.

Investors' love for Sundial boils down to a handful of factors. First off, it's cannabis. It's no secret that weed will be a fast-growing industry over the next five to 10 years, and investors appear to be counting on Sundial to take advantage of this growth.

Secondly, Sundial has cleaned up its balance sheet and raised a boatload of capital. Following the exercising of 98.3 million warrants in February and its investment in Indiva, my estimation is the company has in the neighborhood of $680 million in cash and equivalents in its coffers. That potentially makes Sundial the third- or fourth-most cash-rich cannabis stock of the entire industry.

Third, Sundial looks to be focusing on its long-term margins. The company's management team is in the process of switching its operating model from wholesale to retail. It's a bit more work, but retail offers substantially juicier long-term margins and fewer oversupply concerns than wholesale.

Finally, we can't overlook the 800-pound gorilla in the room: Reddit. Retail investors on Reddit's WallStreetBets chatroom have taken a liking to heavily short-sold and/or highly liquid penny stocks. In Sundial's case, we're predominantly talking about the latter, with its low single-digit share price acting as a lure for momentum-chasing investors.

An accountant chewing on a pencil while examining figures from a printing calculator.

Image source: Getty Images.

Wall Street's price target for Sundial rose 20%, with a catch

But it's not just retail investors that have a more positive outlook for Sundial. Last week, Wall Street's consensus one-year price target for the company jumped by 20%. However, before you go mashing the buy button in your brokerage account, you should know that this increase is accompanied by a pretty big catch.

Wall Street's 20% price target bump raised the consensus on Sundial from (drum roll) $0.30 per share to $0.36. With the company closing at $1.135 this past week, professional investors are still counting on shares to decline by 68% over the coming 12 months.

If you're wondering why Wall Street is so negative on Sundial, I've got three logical answers.

To begin with, Sundial Growers' management team improved its balance sheet by walking all over existing shareholders. The company has undertaken so many share offerings, at-the-market offerings, warrant exercises, and debt-to-equity swaps that its outstanding share count ballooned by more than 1.1 billion shares in just five months. Following the exercising of 98.3 million warrants, I estimate the company has 1.66 billion outstanding shares.

To add, Sundial's board approved a $1 billion shelf offering earlier this year. This would allow the company to potentially sell up to $1 billion worth of its stock over time. Translation: This share-based dilution isn't going to stop anytime soon. Having seen what incessant dilution did to Aurora Cannabis, Wall Street's price target wisely implies investors keep their distance.

A smoldering cannabis bud that's beginning to turn black.

Image source: Getty Images.

Second, the company's transition to a retail model is coming fairly late in the hypergrowth portion of the cannabis industry's growth cycle. Aside from being behind most of its peers and having to build up its brand in a crowded retail market, Sundial has been forced to take sizable writedowns during its transition. While most of its peers are making the move to recurring profitability, Sundial's losses will stand out like a sore thumb.

And third, the company's fundamentals have wildly detached from its current valuation (even taking into account that it's lost 75% from its recent intraday highs). According to Wall Street, Sundial Growers is on track for $71 million in sales in 2021 and close to $82 million in 2022. This works out to respective multiples of 25 and 22 times sales. By comparison, most U.S. multistate operators are turning the corner to profitability and priced at roughly 3 to 5 times next years' sales.

Wall Street isn't always right. But there are more than enough red flags here to encourage investors to keep their distance from Sundial Growers.