The Canadian marijuana cultivator Aphria (NASDAQ:APHA) satisfied investors with its latest earnings report, growing its net revenue by 16% from the same quarter last year. Between the company's ongoing efforts to drive down the cost of each gram of cannabis sold and maintain its rising gross profit margin, the company looks like it's on on a positive trajectory. But, like many other cannabis companies, Aphria is still struggling to post reliable profits despite scaling up its operations and launching new cannabis brands.

Is Aphria just another marijuana company that's doomed for unprofitability for years on end, much to the chagrin of its investors? Or is it a stock that's content to grow more slowly within its markets rather than risk overcommitment to the high fixed costs that have stunted its seemingly more ambitious competitors? In my view, Aphria still has some work to do before it's a must-buy, but so far, the company's cautious advancement means that it hasn't fallen victim to some of the problems plaguing its peers.

From a faded background, a hand emerges, holding a white paper bag with a green marijuana leaf printed on the front.

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Aphria's product strategy appears to be working

The first thing to realize about Aphria is that it's a product-oriented cannabis company. It is not a low-cost cannabis cultivator that needs to survive on volume alone.

Aphria owns a handful of medicinal and recreational cannabis brands, ranging from its Broken Coast brand of luxury cannabis products to its P'Tite Pof Quebecois-themed value segment. Unlike many of its publicly held competitors, Aphria's brands have won a handful of awards within the Canadian cannabis industry, suggesting that the company is more effective at product development and marketing. In terms of its market share, Aphria's mid-market brand, Good Supply, is the top-selling vaporizer brand in Canada. Its sales also grew nearly 234% year over year in the second quarter, making it the company's most rapidly growing product segment by far. Unfortunately, aside from Good Supply, Aphria's other brands don't have anywhere near the same market share or growth, even if they've been lauded for their quality. 

Right now, Aphria plans to grow its market share within Canada, though it also plans to enter the American cannabis beverage market by acquiring SW (Sweetwater) Brewing Company. This acquisition could be favorable, as Aphria's heavy reliance on sales in its international medicinal markets like Germany currently leaves it exposed to downside risk from changes in international policy and consumer behavior. In its worldwide adult-use cannabis segment, Aphria has grown its revenue by 27% quarter over quarter since late October 2019. After its entry into the U.S. market through the Sweetwater acquisition, adult-use cannabis product revenue will likely rise over the next year. 

In terms of its product segments, Aphria's vaporizers capture around 29% of the Canadian cannabis vape market, and it plans to launch more than two dozen additional vape products in the next year. If its vaporizers-first strategy proves to be successful, look for it to be replicated elsewhere in its international markets.

Will international expansion be profitable, or will it be unnecessary? 

Despite its favorable market share and revenue growth in Canada, Aphria's international reach is significantly more constrained than its competitors', which sometimes span dozens of countries. Currently, Aphria operates in Canada, Germany, Italy, Colombia, and Argentina. This means that unless it is willing to spend big as it enters the U.S. market, it won't gain much from growing cannabis legalization efforts there. Nor will its stock get a boost from headlines heralding new breakthroughs in legalization like its competitors will.

In the meantime, Aphria's primary target outside of Canada is the German medicinal cannabis market, though it has aspirations to expand further in Latin America. Given that Aphria's revenue in Germany is concentrated heavily in its distributor, CC Pharma, it may benefit from diversifying its holdings within its established international markets. In contrast, investing more in its international segments may detract from its growth at home, and there's no guarantee that it will reap rewards from doubling down on its operations in Germany.

The goods news? Aphria's caution shows wisdom

So, is Aphria's stock worth a buy? Given its favorable but largely underwhelming quarterly earnings report, I don't think I will be buying the stock anytime soon, but I think it might be a worthwhile addition in a year or so. The company's caution with its international strategy suggests that its leadership is wiser than that of some of its competitors. But its aspirations to enter the German medicinal market do not necessarily mesh with its demonstrated strengths in developing cannabis products for the adult recreational use market. 

Though its stock isn't vastly overvalued compared to its price in the past, the company still needs to close the loop on its profitability. Currently, Aphria's trailing price to sales (P/S) ratio is resting near 3.4, which is significantly lower than its high of 75.65 in August of 2018. This is favorable for investors who might be skittish about purchasing the stock at its current price. Finally, while its progress in capturing a share of the Canadian vaporizer market is meaningful, its revenue will need to rise faster than it has been recently if the company wants its stock to start growing more rapidly.

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.