Should I invest in AeroGrow International, Inc. (AERO)?

Here are three reasons to invest in AeroGrow International stock (AERO) and three reasons to avoid it.

What does AeroGrow International (AERO) do?

AeroGrow designs and markets the Miracle-Gro AeroGarden brand of products. The company’s headquartered in Boulder, Colorado – ground zero for the push to legalize pot. AeroGardens aren’t necessarily marketed to grow pot indoors, but they can sure as hell be used for that (proof here), and the company probably sells quite a few units to DIY pot-growers. AeroGrow’s motto is “Grow Anything… Anytime… Guaranteed.”

Three reasons NOT to invest in AeroGrow International stock (AERO)

1) Got profits? AERO hasn’t posted a positive year in the past four years. The company lost $0.18 per share (or $1.5 million) in the year ending Q1 2016. No company can consistently post losses without borrowing more money or going under.

2) Increased competition. AERO’s small and specialized enough that the company hasn’t faced serious competition. That said, their systems aren’t chock full of high-tech, hard-to-duplicate technology. If a company with scale moved into the space, it could probably create a cheaper indoor gardening kit that could threaten AERO’s viability.

3) Thin trading. AeroGrow International is an over-the-counter stock. That means it’s not subject to the same stringent reporting requirements of stocks that trade on major exchanges like the NASDAQ. It’s also thinly traded with just 21,000 shares trading hands per day. Tesla (TSLA) averages more than 3 million shares traded every day. If you buy a big position in AeroGrow and want to offload it, it could be days or weeks before you find enough buyers.

Three reasons to invest in AeroGrow International stock (AERO)

1) Revenue is trending up. AERO’s revenue has more than doubled over the past two years from $9 million at the end of Q1 2014 to $19.6 million at the end of Q1 2016. That’s a blistering pace. “We grew by 10% last year (with accelerated growth in the second half of the year highlighted by 43% growth in our Q4) and improved our gross margin by nearly 500 basis points to 36%,” writes CEO J. Michael Wolfe in the company’s latest investor letter.

2) A world-class partnership. AERO partnered with Scotts Miracle-Gro Co. (NYSE:SMG) three years ago. That deal allowed them to start branding their AeroGardens as Miracle-Gro products. Not only does the deal show that Scotts believes in AeroGarden’s viability (and trusts the company to uphold their brand), but it significantly boosted sales for the young company.

3) Product pipeline. AERO’s committed to enhancing the company’s product line. One thing they plan to add is wi-fi-enabled growers. “This is a significant undertaking, but we’re hopeful that by later this year AeroGardeners will be able to communicate with their garden and track its progress on their smart devices,” the company writes. “From receiving reminders on when to water and fertilize the garden to making it super-easy to re-order seed kits and supplies, we think this is a big idea that will drive further engagement with our customers.” AERO’s also focusing on building larger grow kits with more powerful lights – a move that could get pot-growers excited as a common complaint about AeroGardens is the small size of the units.

Should I buy AeroGrow International stock (AERO)?

The company’s slowly moving toward profitability. Occasional cash infusions from Scotts have helped the company grow, and indicate that Scotts (which owns a 39 percent stake in the company) has faith in AERO’s future prospects. Year-to-date, AeroGrow’s up more than 200 percent, yet the stock still has a market cap of just $26 million. If pot did get legalized in other states, AeroGrow could potentially create a product specifically for home-based marijuana cultivation.

When asked how large AeroGrow might get, Wolfe answers like a politician: “The truth is that I don’t know, but I believe it can become a much bigger company than it is today … one that consistently generates good bottom line results while bringing innovative new products to market. The AeroGarden is a product that is ‘right for the times,’ with consumers wanting fresh, safe, convenient food more than ever. And I feel like we’ve really just begun to unlock our North American distribution with Europe and other markets showing considerable promise. Now with improved margins and our branding efforts starting to bear fruit, I’m optimistic that we’re entering a period of strong, sustainable sales and earnings growth.”

It all adds up to a company that’s poised to turned profitable, which makes it a tantalizing stock. It very well could be at an inflection point. If you’re looking for a pure play on pot stocks, though, I’d look elsewhere.

Nano-cap stocks are stocks with a market capitalization of $50 million or less. Check out more of my write-ups on nano-cap stocks here. Full disclosure: I do not own a position in AERO, and I do not plan to initiate one in the next 72 hours.