The Canadian cannabis industry achieved a major milestone this summer, when the legal marijuana market generated higher sales than the black market for the first time ever, according to data from Statistics Canada. Because the industry is experiencing high consumer demand amid the coronavirus pandemic and continues to steal market share from illicit operations, now seems like a good time to invest in Canadian pot stocks again.

Two of the biggest names north of the border are British Columbia-based Tilray (TLRY) and Aphria (APHA), which has its headquarters in Ontario. But there's much more than geography that separates these two companies. One may be a little too dependent on the international market, while the other has significant exposure to a volatile hemp sector. Let's take a look at which makes for a better investment right now.

Is Tilray too cheap to pass up?

Shares of Tilray are down almost 70% in 2020. To contrarian investors, this dip makes Tilray an appealing buy because of its extra room to grow, should its business recover. The company released its recent second-quarter results on Aug. 10 for the period ended June 30, and its sales of $50.4 million were up a modest 10% from the prior-year period. A mixed bag of results showed its international medical segment climbing to $8.3 million and up 349% year over year, while the adult-use market rose by 17% to $17.6 million. Hemp revenue, meanwhile, grew by just 2% to $20.2 million. While diversification is a strong point for the company, it also makes it very difficult to predict exactly how well the business will fare in future quarters.

Gloved hands trimming weeds.

Image source: Getty Images.

And that diversification has done little to help the bottom line; Tilray has incurred a loss in each of its last five quarterly results. The company's adjusted earnings before income, taxes, depreciation, and amortization (EBITDA) loss of $12.3 million, was, however, an improvement from the first quarter, when it reported an adjusted EBITDA loss of $19.7 million. Tilray is aiming to breakeven in adjusted EBITDA by the fourth quarter, and plans to grow positive EBITDA thereafter.

But the bigger problem for Tilray may be that it's become more of a hemp company -- and that could put investors off. Hemp is Tilray's largest segment, generating $41.6 million in revenue through the first six months of the year compared to the adult-use market, which recorded sales of $38.5 million over the same period. Not only is hemp a highly competitive segment of the market, but the U.S. Drug Enforcement Administration (DEA) proposed draft rules in August for hemp that could make it easier for companies to run afoul of the 0.3% tetrahydrocannabinol (THC) limitation. The 0.3% limitation pf the psychoactive ingredient may also apply to the extraction process if the new rules are finalized. While the DEA's proposed rules aren't set in stone just yet, they're of serious concern to Tilray, and could make the stock a risky buy.

Does Aphria's stronger bottom line make it a safer buy?

Aphria is down just 2% in 2020, and investors are speaking with their investment dollars that it's the better cannabis buy, outperforming not just Tilray's stock but also the Horizons Marijuana Life Sciences ETF (HMLSF 4.71%), which has fallen more than 33% this year. But that doesn't mean Aphria is an investment without concerns.

In its fourth-quarter results, which it released on July 29, the pot producer recorded an eye-popping net loss of 98.8 million Canadian dollars for the period ended May 31. It's not typical for Aphria to post such a large loss, so it's no surprise its stock fell on the results. A big part of the reason behind the poor quarter was that Aphria incurred impairment charges of CA$64 million during the period, which weighed on its bottom line. But technically, it reported an adjusted EBITDA of CA$8.6 million, the fifth straight period that number has been in the black.

My biggest concern is whether the company is becoming too dependent on its distribution revenue, which at CA$99.1 million was almost double its net cannabis revenue of CA$53.1 million during the period. And CA$97.1 million of that distribution revenue in Q4 was due to CC Pharma, a German-based distributor of pharmaceutical products and medical marijuana that Aphria acquired in January 2019. Aphria's net cannabis revenue in Q4 was down 4.5% from the previous quarter. Its distribution revenue grew at a rate of 12.2% over the same period and was the key driver of growth.

This is a trend that investors should look out for, because while diversification is good (especially internationally), a company should also be growing its core business, and that doesn't appear to be happening of late for Aphria.

Despite the uncertainty, Aphria still gets the edge

Both Tilray and Aphria face risks moving forward for a whole host of reasons. Aphria is too dependent on CC Pharma, while Tilray's exposure to hemp makes it an unappealing investment. However, legal issues are a greater concern, as they can permanently undermine how a business operates. And that's why investors will be more comfortable with Aphria's risk than Tilray's. There has been a lot less volatility in Aphria's share prices this year, relatively speaking. Here's a quick recap of how the two pot stocks are performing in 2020:

TLRY Chart

TLRY data by YCharts

And although Tilray has fallen sharply during this time, it's still not much cheaper than Aphria on a price-to-sales (P/S) basis:

TLRY PS Ratio Chart

TLRY PS Ratio data by YCharts

With better financials, less risk, less volatility, and a fair valuation, Aphria looks like one of the better buys in the marijuana industry today.