Momentum continues to pick up for the marijuana industry. But not every marijuana stock is prospering.

Auxly Cannabis (NASDAQOTH:CBWTF) lost more than half its value in 2018, making it one of the 10 worst-performing marijuana stocks of the year. So far in 2019, the stock is down close to 20% while the shares of many of its peers are soaring. But is Auxly now such a bargain that it's a great pick for long-term investors to buy?

Marijuana growing in a greenhouse.

Image source: Getty Images.

The good

Auxly's share price hasn't reflected the tremendous potential the company has. But that potential exists nonetheless.

Estimates vary about just how big the global marijuana market could be. However, projections of $100 billion or more within the next decade don't appear to be unrealistic. Auxly itself estimates that the total market could be close to $50 billion by 2024. The company doesn't have to be a big player in a market of that size to be enormously successful.

Auxly offers one key advantage to investors that most marijuana stocks don't: diversification across the cannabis supply chain. The company's revenue streaming partnerships, joint ventures, equity investments, and subsidiaries make Auxly a player in the upstream cultivation, midstream extraction and processing, and downstream distribution and sales segments of the cannabis industry.

With its upstream partnerships, Auxly is on track for a funded annual production capacity of around 50,000 kilograms this year. By the end of 2021, the company expects to boost that level to 170,000 kilograms.

Over the long run, the most attractive profits could be in the midstream part of the business. Auxly's DoseCann subsidiary, which has extraction and processing operations, could be an especially big winner down the road.

Auxly isn't just focused on marijuana. Its majority stake in Uruguay-based Inverell gives the company a large-scale hemp operation in South America.    

The bad

Despite its impressive efforts in wheeling and dealing, Auxly has yet to make even a cent of profit. In the third quarter of 2018, the company posted a loss totaling nearly 4.6 million Canadian dollars, or around $3.5 million.

Auxly's problem isn't just that it's spending a lot of money (which it is); the company simply isn't making much revenue, either. In Q3, Auxly's revenue totaled a measly CA$512,000 -- roughly $385,000.

The primary issue for Auxly is that most of its upstream partners are still ramping up their production capacity. They can't sell what they can't produce. 

This underscores how dependent Auxly's fortunes are on other parties. The company ran into a problem with this reliance recently. Auxly and FSD Pharma formed a joint venture to develop part of FSD's Ontario cannabis facility. However, after what Auxly referred to as "contractual breaches relating to FSD Pharma's management and staffing obligations" related to the joint venture facility, the deal fell apart.

And the ugly

What's the worst thing about investing in Auxly Cannabis? Its ridiculously high amount of dilution.

Auxly has to be able to access a lot of capital to fund all of the deals that it makes. Unfortunately, a key way that the company raises that capital is through bought-deal financing, a transaction where it issues new shares with underwriters agreeing to assume all of the price risk by committing to buy the shares upfront.

Although these bought-deal financing transactions provide the cash that Auxly needs, the issuance of new shares reduces the value of existing shares. To understand just how rough this is on shareholders, consider that Auxly's market cap actually increased by 48% last year -- but its share price plunged more than 50% because of dilution. 

To buy or not to buy?

Several of the negatives associated with Auxly Cannabis could diminish over time. The company's partners should begin to increase their sales, with Auxly receiving its share of the revenue. As Auxly makes more money, it will be less dependent on dilutive bought-deal financing to raise additional capital.

But while Auxly could very well succeed over the long run, my view is that it remains a stock to monitor rather than buy. I think there are several other marijuana stocks that are in a better position to deliver solid returns for investors sooner rather than later.