Shares of Aphria (NYSE:APHA) have tumbled about 16% since the company reported earnings results for its fiscal third quarter. This was the first full quarter since the company and its peers began selling adult-use recreational marijuana in Canada, and investors enthusiastic about the future are wondering if the market has overreacted and created a bargain opportunity.

Let's take a closer look at the road ahead of Aphria to see if this troubled marijuana stock is a buy right now.

Hundred-dollar bill obscured by a cannabis leaf.

Image source: Getty Images.

Reasons to buy

Once Health Canada gives a regulatory green light to some recent additions, Aphria will have more than 2.4 million square feet of cultivation space capable of producing at least 255,000 kilograms of cannabis. The company's also adding an "Extraction Center of Excellence" to the Aphria One facility that will be able to process around 200,000 kg of cannabis annually into edibles and concentrates. Health Canada expects it will allow these popular options to go on sale later this year.

Aphria has also developed a shelf-stable, water-soluble, and flavorless cannabinoid nano-emulsion formulation that provides an initial onset within 10 to 15 minutes if used in a beverage.

During Aphria's fiscal third quarter, which ended on Feb. 28, 2019, net revenue soared 617% compared to the previous-year period to 73.6 million Canadian dollars. Edibles, beverages, and cartridges ready for vaporizers could begin pushing domestic revenue much higher before the end of the year.

Revenue from the company's distribution operation surged from nearly nothing to CA$57.6 million during the fiscal third quarter. This new reporting segment involves purchasing cannabis from other producers then reselling it to pharmacies. The acquisition of CC Pharma in January gives Aphria access to more than 13,000 pharmacies in Germany.

The company doesn't break down revenue by geographic region, but we do know that 79% of net revenue came from outside Canada during the fiscal third quarter.

Cannabis oil in tiny bottles.

Image source: Getty Images.

Reasons to be nervous

Aphria is working through some disturbing corporate governance issues. Former CEO Vic Neufeld was one of several Aphria insiders that also served on Liberty Health's board of directors. During the fiscal third quarter ended February, Aphria recorded a CA$50 million impairment related to a basket of Latin American businesses it acquired from Scythian Biosciences in September.

Aphria shares tanked not long after the acquisition thanks to allegations of double-dealing, which were hard to shake off. That's because Neufeld stepped down from his position as chairman of Scythian's board of directors on April 24, 2018, and less than three months later, Aphria announced its deal with Scythian.

Neufeld's no longer CEO, and there have been several additions and deletions to Aphria's board of directors in an effort to convince investors that there's nothing to worry about.

Enough growth ahead?

Aphria recently announced a plan to raise $345 million from the sale of convertible notes that are due in 2024. If unpaid and converted at recent prices, that works out to around 44 million shares or about 18% of the amount currently outstanding. Once completed, shareholders will need the company to earn that much more to produce the return they were expecting when they bought the stock.

Aphria has been able to boost its top-line revenue number by acting as a wholesale cannabis distributor, but margins in that segment are slim. As a result, operations lost a staggering CA$89.3 million during the three months ended Feb. 28, 2019.

At this pace, Aphria's going to burn through all CA$108 million that was on its balance sheet at the end of February plus the proceeds of its upcoming convertible note offering in about a year. If cannabis sales don't triple over the next couple of years, stock dilution will chew through any chance to outperform the market.

Hand trimming a plastic bag full of cannabis.

Image source: Getty Images.

Not a chance

Aphria's losses will probably widen thanks to a Canadian market for licensed cannabis that peaked in December. In Canada, licensed cannabis sales fell in January, and they probably aren't getting any higher.

Health Canada recently reported that Canadians bought just 6,671 kg of licensed dried cannabis in February. That was 8.8% less than January, and concentrates aren't doing much better. Oil sales peaked in January then fell 8.5% to 7,244 liters in February thanks to an untaxed illicit market that operates with impunity.

Businesses have been complaining about supply constraints, but it seems like retail outlets simply don't have enough of the items people are willing to pay a premium for. Health Canada also reported 23,739 kg of dry cannabis packaged and ready for sale in the supply chain last month, plus 59,417 liters of ready-for-sale cannabis oil products waiting for a chance to make someone feel better.

There are a handful of larger producers and dozens of smaller ones all fighting for a share of a Canadian market for licensed cannabis that might not be very big. If sales don't improve by leaps and bounds, Canada's licensed producers will only need to grow a combined 500,000 kg of cannabis annually to supply their entire domestic market. In another year, that will work out to just a sliver of Canada's potential capacity.

Until licensed cannabis producers find a way to compete with illicit markets, Aphria stock looks like a falling knife that could cut your portfolio into pieces.