Written by Jamie Louko

July 12, 2021

AppHarvest, Inc. (APPH)

Summary

• AppHarvest is trying to reimagine how consumers see produce.

• With sustainability as one of their key focuses, AppHarvest separates itself from the pack of traditional farmers, and its size, scalability, and offering selection separate itself from other agtech players.

• In this article, I am going to examine some of the most recent news AppHarvest has shared with investors, as well as looking back at AppHarvest compared with other agtech players.

Investment Thesis

The agtech and sustainable farming industry has proved to be more efficient and sustainable compared to traditional farming. However, the difference and competitive edge lie between each sustainable farming business. These agtech businesses achieve similar sustainability and efficiency goals, so the competitive advantage comes in other forms. AppHarvest's (APPH) competitive advantage comes in the form of the size and scale potential of their farms, as well as their broad expansion of product offerings. Because of this, AppHarvest is one of the stronger players in the agtech space, and investors who want to play in this industry should be considering AppHarvest before other competitors.

Where We Last Left Off, and What's New

In my last article about AppHarvest, a large-scale indoor farming business operating in central Appalachia, I focused on the competitive advantages over traditional farming operations. Since then, other indoor farming businesses similar to AppHarvest have come out of the woodwork and announced plans to trade as public companies. Some of these businesses include AeroFarms (SV, will become ARFM), a sustainable farmer focused on vertical farming, Local Bounti (LIII, will become LOCL), an indoor farming business located in the pacific northwest, and Infarm, a German-based distributor who has become the world-leader in indoor farming. Infarm has rumored to becoming public via SPAC with Kernel Group Holdings Inc. (KRNL), but nothing definitive has been reached.

As these businesses show their superiority, they all claim similar sustainability and efficiency metrics. Most businesses claim that their use of water is extremely efficient, as is their optimization for crop growth, and their LEDs allow for optimal sunlight. Simply, all of these businesses have very similar technology that makes them superior to traditional farming, but this does not mean success for any individual business within the agtech industry. They all show that the agtech industry is superior, but rather they should focus on what makes their business superior to other agtech players.

In my opinion, traditional farming is a dying industry, and it is sensible that sustainable farming and greenhouses will be the future of farming. Therefore, it is sensible that the agtech business should be demonstrating its competitive advantages over other agtech competitors, rather than traditional farming.

AppHarvest, even in this sense, does stand out from the competition. They are slowly becoming a bigger player in this space, and one that is starting to run ahead of the pack. While other agtech businesses are busy constructing their first farm, AppHarvest has jumped ahead with the production of its next 4 farms. While its competitors are starting small with only 1-2-acre farms, AppHarvest has positioned itself well with 15-60-acre farms. AppHarvest's competitors are currently focusing on one product category, yet AppHarvest is rapidly expanding its product offerings.

In an industry that is growing rapidly, AppHarvest is executing everywhere it needs to, and it is allowing for AppHarvest to set itself apart from the competition.

Competitive Advantages Over Agtech Businesses

AppHarvest has three quality characteristics that show it is stronger than most of its agtech competitors. Due to the size and scalability of its farms, expansion in offerings, and consistent execution, AppHarvest is proving to investors that they are one of the stronger players in this industry.

Size and Scale of Farms

One of AppHarvest's strongest competitive advantages within the agtech space is the size of its facilities. These facilities are absolutely massive, with their first facility 60 acres in size. This allows for mass production of sustainable-grown produce at a scale that no other agtech business has. These facilities can often take longer to construct, but once constructed, there is a long runway for growth and full-scale operations for it. It would take substantially less time to fully scale a farm this size compared to building and scaling 60 1-acre greenhouses.

The second option is what Local Bounti is doing, for their facilities are only 1-2-acre facilities. They plan on constructing 9 facilities by 2025, 8 of which will be roughly 5 acres, which would only lead to a maximum growing capacity of 42 acres. This goal of 42 acres would be less than AppHarvest's currently operating growing capacity.

Clearly, the size of AppHarvest's farms is a massive advantage for them. The scalability of these farms gives them an even greater lead. AppHarvest expects production of their first facility in Morehead, Kentucky to be fully scaled by the end of 2021, whereas Local Bounti's 42 acres would not be fully operational and scaled until at least 2025. AppHarvest would then have 4 years of fully-scaled operations to build a brand, strengthen the balance sheet, and fuel more growth for AppHarvest.

The scalability shows itself through guidance estimates for FY 2021 as well. By the year's end, at full-production, AppHarvest expects to make $21 million in revenue, whereas Local Bounti only expects to make $13 million by the end of 2022. The size and scalability of AppHarvest's farms are simply unmatched by its competitors, and as they build more farms (I will dive into that shortly), these size and scale advantages will only become more prevalent.

Offering Expansion

Compared to its competitors, AppHarvest is planning to expand its product offerings at a faster rate. One of the keys to success for these agtech businesses is having a successful brand, and one way to grow a brand is to put it in the eyes of more customers. One way to do this is by expanding the products offered. That way, both salad enthusiasts can eat the leafy greens and tomatoes produced, while berry lovers (like myself) can also recognize the brand. If a business were to only focus on leafy greens, then they would not achieve brand recognition from people like me as much.

AppHarvest's offering expansion is happening fast, and it will only be a matter of time before AppHarvest can offer products in various categories, rather than simply tomatoes. Their primary facility in Morehead, KY, solely produces tomatoes, but they have 4 facilities under operation that will be producing a wide variety of offerings. Here are the 4 facilities being constructed, along with what they will be producing:

Facility LocationProduction CategoryAcreageExpected Construction Completion DateBerea KYLeafy Greens15Q3 2022Richmond KYVine Crops60Q4 2022Somerset KYBerries30Q4 2022Morehead KYLeafy Greens15Q4 2022

Considering that AppHarvest currently focuses solely on tomatoes, expansion into 3 other product categories is a wonderful step in growing its brand recognition. This is something that few of its competitors are doing. Local Bounti does not have any structural plans on expansion out of leafy greens, and AeroFarms has plans to expand into berries for its primary leafy greens production.

As previously mentioned, I believe that offering expansion is important to the brand growth for these agtech businesses. As they expand their offerings, they will be able to get their products and their name in front of more consumers. AppHarvest has started showing signs of doing this well, where its competitors have failed to do the same.

Signs of Execution

One of the risks I mentioned in my last article was about the ability of management to meet or exceed guidance they put out for themselves. This included construction guidance. In their investor presentation, they expected to have 4 facilities up and running by the end of 2022, including their main facility in Morehead. Recently, they announced plans to construct two additional facilities, meaning that they are now expecting to have 5 facilities up and running by the end of 2022.

This seems small on the surface, but this is the exact type of execution proof that I look for in small businesses like AppHarvest. The fact that management was able to start construction on more farms than expected and thus increase their timeline shows that they are executing and exceeding the guidance they set out for themselves.

For investors, this should demonstrate that AppHarvest management can be trusted, for their guidance was beaten. Management was able to beat their own guidance, and that should show investors that AppHarvest is not just a pipe dream, but it actually has something tangible to run with and build.

A Look at My Risks: What Risks are Still Present, and What Risks Have Grown

In my last article, I noted many risks that are potential with the business:

• AppHarvest is unable to grow its factories at or faster than projections.

• Their Mastronardi partnership goes awry.

• They are unable to educate the broader public on what makes them special.

• AppHarvest is unable to lower prices.

• Management leaves the company.

For the most part, all of these risks are still prevalent today, if not even more important. Although they have begun to prove they can beat their own guidance, they will still need to continue to prove this, both in quarterly and yearly financial estimates, but also through construction estimates.

Their Mastronardi partnership is still fragile, and if anything were to happen with that partnership AppHarvest would have no way of distributing its product to local grocers, which could potentially decimate this business.

Although the offering expansion will make it easier to gain brand recognition and thus educate the broader public about their business, this will likely always remain a risk as long as traditional farming produce dominates grocery store shelves. Gaining brand recognition will also go a long way in being able to lower prices. So, while their offering expansion has the potential to increase brand recognition for AppHarvest, risks still remain and likely will remain for a long time.

Even though management seems very happy at AppHarvest, and loss of a major figure, Jonathan Webb specifically, would greatly damage their business. Management is the face of the business until they are able to bring products to shelves at a very large scale, so management impressing investors is largely how they will gain capital to subsidize the financing of their farm construction. If the face of AppHarvest were to leave, it could hurt their ability to receive financing and thus their ability to develop their facilities.

After seeing many agtech businesses come to the market via SPAC, there has been more concern about competition in this space. Because of this, I would likely add competition as a risk to AppHarvest. While many of its competitors are pre-revenue and are not far along on facility construction, they do have a competitor that is much larger than AppHarvest. Infarm is a German-based sustainable food producer that sells its product internationally, with the U.S. being its most recent expansion area. They have expanded broadly in Europe, and they seem to have their eyes set on the United States. This could pose a tremendous risk for AppHarvest, for there is no agtech player that comes close to the size of Infarm. They have $19 million in sales across the world compared to AppHarvest's $2 million last quarter.

AppHarvest's competition is fierce, and there is no doubt that the competitive threats will slow as time goes on. Therefore, I am confident to say that AppHarvest will have to fight against fierce competition in order to gain market share in the U.S., but their competitive advantages listed above will be able to help them do so.

Recent Stock Decline: Buying Opportunity?

AppHarvest's stock price has plunged in recent months, falling roughly 58% since February 2021.

This has put AppHarvest's market cap roughly around $1.5 billion and dropped their valuation down from extremely high multiples to still high, but comparatively lower multiples. Currently, it is trading over 600x sales, but it is trading at 73x forward sales if investors are looking at FY 2021 revenue estimates.

A business that just got its first revenue in Q1 of 2020 is obviously going to have extremely high valuation multiples, but revenue is growing extremely fast, and it is expected to continue to do so. Considering that the stock price has had a tremendous fall from grace, and revenue is expected to grow rapidly, today could potentially be a wonderful time to invest in this business at a very low price.

Conclusion

As I have said before, an investment in AppHarvest is not for the faint of heart. It is valued at very high multiples, and the number of risks for this business is high. AppHarvest will need to continuously execute at a strong level, for there is little room for slip-ups. With plenty of competition in the agtech market, AppHarvest will need to hold onto its competitive advantages tight if it wants to be a market leader in this industry.

Despite all of this, AppHarvest is one of the better investments for investors who want to get in on the agtech industry. They are one of the few companies with strong competitive advantages, and there are very few companies that could construct what AppHarvest is constructing. Their valuation is high now, but as they grow revenue it is likely that it will rapidly decrease, and it will be much more reasonable in the future. The risks associated with this business are plenty, but management has begun to prove they can efficiently execute.

For risk-tolerant and volatility-tolerant investors who wish to capitalize on the sustainable produce transformation, AppHarvest is one of the best bets to make. Their competitive advantages are strong, and they are one of the only businesses that have proved they have the ability to accomplish what they say they can. Because of this, I am recommending that risk-tolerant and volatility-tolerant investors who wish to invest in agtech should consider AppHarvest before any other competitors.

Lead photo: Source: Investor Presentation

This article was written by

Jamie Louko

I am a college student who has found a deep thirst for learning and investing. Being very young, I have leaned toward very long-term investments and growth stocks, primarily in tech. I do, however, love consumer goods companies as well. Currently, I am studying International Business and Economics.

Long Only, Growth, Long-Term Horizon, Tech

Contributor Since 2021

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.