Many investors would argue that Aphria (NASDAQ:APHA) is a consistent performer in a sector where volatile stock shifts are the norm. Down 10% this year, the pot stock has performed much better than the Horizons Marijuana Life Sciences ETF, which has fallen by 30% over the same period. And Aphria is nowhere near as bad of a short investment as Aurora Cannabis' stock has been for new investors, which has crashed a staggering 81% since Jan. 1.

Aphria is coming off an uninspiring quarterly report that sent its stock into a dive. Investors should be asking whether to buy shares of Aphria on its new dip, or if this could be the start of an even bigger decline. Let's take a closer look at the recent results and find out why they weren't cause for investor optimism.

Cannabis plant.

Image source: Getty Images.

A quick breakdown of the results

Aphria released its first-quarter results of FY 2021 on Oct. 15, reporting positive adjusted earnings before income, taxes, depreciation, and amortization (EBITDA) for the sixth straight period. Another highlight was its cannabis revenue for the period ended Aug. 31, which was 82.2 million Canadian dollars, growing by 134% from the prior-year period. But the company's total net revenue of CA$145.7 million was down from the fourth quarter of 2020, for which Aphria reported CA$152.2 million in net sales. Q1 revenues were well shy of the CA$159.6 million that analysts expected.

Aphria's distribution revenue, which was CA$82.2 million for the quarter, declined more than 17% from Q4, when it was just under CA$100 million. The bulk of Aphria's distribution business comes from its German distributor, CC Pharma, which accounts for 97% of that segment's total sales.

The pot company blamed the poor results on COVID-19 and cited a report from Health Canada, which said that 70% of physicians weren't seeing as many patients as they were before the pandemic. The company is hoping that the shrink in visits resulted in the reduction of medical marijuana prescriptions. Aphria also pointed to supply chain issues, noting that the pandemic has negatively impacted suppliers in various countries.

Why the results weren't good enough

On top of missing analyst expectations, the other glaring negative was that Aphria incurred a net loss of CA$5.1 million in Q1 compared to a profit of CA$16.4 million in the same period last year. Aphria has reported a net loss in three of its last four quarterly results.

While the adjusted EBITDA number is encouraging, it can be difficult to gauge exactly what it means. Since it's a non-GAAP number, there is less consistency when evaluating one company against another based on the metric, since there aren't any tight requirements for what adjusted EBITDA includes. And the list of "adjustments" can be significant.

In its Q1 results, Aphria noted the following adjustments from its net loss to arrive at adjusted EBITDA: income taxes, finance expense, non-operating loss, amortization, share-based compensation, fair value adjustments, transaction costs, business under development, and its distribution business. In short, reaching a positive adjusted EBITDA number can sometimes just be an investor-minded exercise in earnings management. That's why accounting income is much more valuable than an adjusted EBITDA number. This helps explain why reaching a sixth straight period of adjusted earnings isn't enough to impress investors.

Another reason to curb excitement for Aphria is the company's sales growth. Although net cannabis sales doubled from the year before, they were up a more modest 18% from Q4. And Aphria's adjusted gross margin on cannabis declined by 3.2%. The company noted that its value brand, B!NGO, helped grow sales this quarter, but at lower margins.

Why there's still cause for optimism

Aphria's CEO, Irwin Simon, acknowledged that the company may not be the first out of the gate when introducing new cannabis products, but said: "I don't mind being slower because I don't want to have something that consumers don't want and I don't want to make the same mistakes." Aphria's still planning to roll out more cannabis derivative products, including beverages, as early as next year. Simon estimates that the cannabis 2.0 segment, as it's often called, could make up 20% of Aphria's total cannabis revenue (today it accounts for 13%, solely from vape product sales).

Simon also dropped a big teaser for investors, saying that "consolidation has got to happen in Canada and there's a chance we will be part of it." Earlier this year, Aphria was rumored to be involved with Aurora Cannabis on a potential deal, although that appeared to fall through. As marijuana stocks continue to fall in value this year, this could be a great time for Aphria to find a partnership at a discount and accelerate its growth.

Should you buy shares of Aphria?

Although Aphria has fallen in recent days to below $5 (it was trading at more than $6 earlier this month), the stock is still nowhere near its 52-week low of $1.95. But price alone isn't enough of a reason to invest in Aphria, especially given how volatile the marijuana industry has proven be. In the past, the company was an attractive buy because it looked to be in a better position to post a profit than its peers, but that doesn't appear to be the case anymore, as lower-margin products will only make it more difficult for Aphria to get its accounting income back into the black. And until that happens, I wouldn't consider investing in the Ontario-based pot producer as its shares could continue to fall even further.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.