The story of Canopy Growth Corp’s most recent quarter was squarely about supply, and PI analyst Jason Zandberg says that is fast becoming a concern for the industry as a whole.

While the world’s largest cannabis stock produced another record quarter in mid-February, Canopy CEO Bruce Linton said it might have been even better.

““The third quarter provided new opportunities and challenges for our business, with demand largely exceeding supply throughout the quarter,” said Linton of the quarter Canopy reported in mid-February.

Zandberg says the market is ramping up fast and with legalization pending here in Canada, Licensed Producers are going to have to step up their game.

“We expect cannabis sales to reach $4.6B by 2019 assuming that the adult-use recreational market commences in mid-2018,” says the analyst. “We expect overall sales to hit $7.4B by 2024. In addition to domestic sales we believe the export market could represent an additional $0.5B to $1.5B. Based on our projections, we believe the Canadian licensed producers will need to cultivate an aggregate of 610,000kg of cannabis to fulfill the demand for domestic and export demand in 2019. Last year’s total estimated production of 31,000kg represents just 5% of this total.”

Zandberg notes that LPs have raised significant amounts of capital that is earmarked specifically to increase this production gap, but he thinks it will still fall short unless the market raises a lot more money from many more players in the space.

“There has been $685M in capital raised in the last 12 months with the majority earmarked for production expansion,” he said in a note to clients this morning. “This capital will go towards capacity expansion which we estimate will total 272,405kg. We expect 20-30 additional licenses could be issued by the federal government over the next two years. We expect these new entrants will add an initial 20,000kg of capacity.”

The analyst reminds how nascent even the established players are in this industry.

“We estimate that a commercial grower needs at least three years to maximize crop yields and reduce crop failures,” he points out. “The average operating history for the Health Canada licensed producers is 1.7 years so the current growers are still on the steep section of the learning curve. We believe yield improvements for current LPs (both existing facilities and new facilities) and future licensed entrants will add almost 100,000kg over the next two years.

But Zandberg says even if all this takes place, the market is still going to have to raise more capital to fulfill the impending demand.

“Even with the current funded capacity expansion, new licenses awarded and potential yield improvement, we believe there is still a shortfall in production capacity of almost 200,000kg,” he says. “We believe that the market still needs to fund $408M to $470M of additional capital to meet the capacity shortfall.”

Zandberg currently has a “Buy” rating and a one-year price target of $14.00 on Canopy Growth Corp (TSX:WEED), and a “Buy” rating and one-year target of $3.75 on OrganiGram (TSXV:OGI). The analyst is currently restricted on Emblem Corp. (TSXV:EMC), Aphria (TSXV:APH), and Cronos Group (TSXV:MJN).