Canopy Growth (NYSE:CGC), along with other marijuana stocks, has enjoyed a strong rebound in January. On Wednesday, those gains accelerated, with CGC stock in particular up 13%. It wasn’t just Canopy Growth though, the ETFMG Alternative Harvest ETF (NYSEARCA:MJ) marijuana ETF also jumped almost 5% on the day and is up 20% off the recent low.

What’s driving the excitement? For one thing, Piper Jaffray suggested earlier this week that both Tilray (NASDAQ:TLRY) and Canopy Growth are buys. However, Piper came in much more bullish on Canopy with a $40 price target whereas it saw only ~12% upside for Tilray up to $90.

On top of that, a good chunk of the short thesis around the controversial marijuana firm Aphria (NYSE:APHA) appears to have been debunked, giving renewed confidence to the sector. So are the pot stocks back? Not so fast.

Legalization In Canada Going Poorly

So far, it appears Canada has bungled its attempt to legalize recreational marijuana use. In the days immediately following legalization in October of last year, there were huge problems. Supplies ran out in various provinces. There was a great deal of confusion around what was available, and so on. It was assumed that these would just be temporary glitches.

However, it appears legalization still isn’t working as planned. A study out this week found, shockingly enough, that black market weed remains way cheaper than the government-sanctioned product in Canada. Statistics Canada ran a survey of prices finding that legal weed cost C$9.70 per gram. That’s far more than the average black market price of C$6.51; almost 50% more in fact.

This highlights two major bearish points for marijuana stocks. For one, margins are going to come way down. Bulls keep emphasizing the upside if pot consumption grows dramatically while prices remain stable. However prices are clearly going to plunge as more supply comes online. On top of that, it’s implausible that legal prices will remain above black market prices for all that long. This, in turn, suggests that government-sanctioned marijuana prices will head sharply lower in Canada in coming months. Additionally, with elections on the way, it’s plausible that marijuana may be a major campaign issue, with the government changing or rolling back parts of its liberalization of pot policy.

Canopy Is Still Expensive

Yes, CGC stock is down from the $50s to the low $30s. But it still isn’t cheap by any normal valuation standard. Even with the prescription marijuana business growing nicely, Canopy has generated just $70 million in revenues over the past year. With a market cap in excess of $7 billion, that means CGC stock is going for more than 100x sales. Normally, for a rapid growth company, 10x sales is considered the far edge of a reasonable valuation. Canopy is ten times that expensive now. To be sure, this valuation ratio will look a little better as recreational revenues come in. Regardless, Canopy needs to grow revenue many times over simply to justify a $33 stock price let alone further upside.

You can argue comparatively that Canopy is cheaper than some of the other marijuana stocks. And this is a legitimate argument in isolation. Canopy is indeed, probably, a better buy than, for example, Aurora Cannabis (NYSE:ACB). However, if a whole sector becomes overvalued, relative cheapness does little to help you. Just ask people who invested in dot-coms in 2000 or blockchain stocks in 2017.

Partner Constellation Hits The Rocks

Canopy may have another problem brewing. One of the big claims to fame for CGC stock was that it had the best industry backer. With beer and wine giant Constellation (NYSE:STZ) taking a massive position in Canopy stock at a high valuation, it validated Canopy’s business model. It had a clear first-mover advantage that appeared to grant it a considerable edge over rival marijuana companies.

But two things have changed. For one, Cronos Group (NASDAQ:CRON) got a better partner. Recently, tobacco giant Altria (NYSE:MO) bought almost half of Cronos, also at a high valuation, effectively establishing it as the marijuana arm of Altria. Altria has a more than $90 billion market cap and is one of the largest cigarette or liquor companies out there. Constellation, while no slouch, weighs in at a considerably smaller $30 billion market cap.

Additionally, Constellation stock has been in freefall. Even leading into Wednesday’s disastrous earnings report, Constellation shares had fallen from $230 to $170. On Wednesday, following a huge guidance shortfall, STZ shares plummeted another 12% to fall back to 2016 levels. Some of this weakness appears directly linked to Constellation’s taking on of additional debt to finance the Canopy deal.

We’ll have to see if Constellation loses any resolve toward backing its partner as its shares further decline and investors question the Canopy acquisition.

CGC Stock: Heading Back to $25

Marijuana stocks are in a difficult space now. Until legalization last October, they could build up the story of future profits. As long as legalization loomed in the distance, it was easy to keep excitement high. Now, however, Canopy and its peers need to deliver the goods.

Yet so far, it seems that legalization is off to a slow start in Canada. There have been numerous supply chain issues, while prices on the black market remain far lower than in legal stores. Over in Oregon, where the market is working more freely, the state has been flooded with a million pounds of excess weed. Needless to say prices in the legal markets will be dropping rapidly in 2019. Throw in some issues with Canopy’s major backer, Constellation, and CGC stock will face strong headwinds this year.

At the time of this writing, Ian Bezek held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.