Agrify Corporation (AGFY) Stock Is Popping High In Pre-Market: What’s Going On?

By Muhammad Ali

August 4, 2021

Shares of the Agrify Corporation (AGFY) stock are popping high in the pre-market trading session on August 4, 2021. AGFY stock price saw a push of 9.56% to reach $21.31 a share at the time of this writing. It seems that stock is continuing the rising momentum as it went up by 5.53% at the previous closing. Let’s understand the reason behind this bull.

What’s Happening?

Agrify Corporation is the hardware and software solution provider for indoor agriculture in the United States. There is no AGFY stock-specific news to justify the bullish sentiment in today’s date. According to a recent announcement, AGFY stock will release its second-quarter 2021 financial results on August 12, 2021, at 5:00 p.m ET.

Recently Craig-Hallum analyst rated AGFY stock as “Buy” and set a price target of $25 per share. The analyst thinks that this stock will expand by offering its products in the future. Furthermore, he is hopeful that Agrify’s revenue from SaaS will be more than double by 2025.

Agrify University: AGFY stock’s Learning Program

AGFY stock on July 19, 2021, did announce the launch of Agrify University that expands on 3,500 sq. ft. This is the innovative and project-based learning program of Agrify stock equipped with Agrify’s latest farming technology and cultivation methods. The hands-on project-based learning will help cannabis cultivators to cultivate cannabis more efficiently.

David Kessler, Agrify’s Chief Science Officer is leading this project. There will be available on-site, on-demand learning options for people to enhance their knowledge of the latest scientific indoor agriculture methods. The management is optimistic that this project will expand the  Agrify ecosystem.

Financial View of the AGFY stock:

AGFY stock showed extraordinary improvement in its first-quarter 2021 revenue. The revenue was 600% higher as compared to the first quarter 2020 revenue. The sales backlog jumped from $59 million in Q4 2020 to $82 million in Q1 2021. The management expects that its full-year revenue will be between $48 million to $50 million.

Wrap Up:

Agrify stock is hot among investors despite any specific reason. The management is focusing on the expansion and overall growth of the stock. Previous financial results were exceptional in terms of revenue and sales backlog. The upcoming financial results next week will further clarify the position of the stock.

AppHarvest: Management Estimates Vs. The Market

By Carleton Hanson

July 28, 2021

Summary

• AppHarvest is a vertical farming company that is ramping up its operations.

• AppHarvest's management has rosy projections for profitability and growth, but the market is skeptical about the company's future.

• If management's estimates are accurate, AppHarvest looks appealing on a future cash flow basis.

• AppHarvest has meaningful downside risk.

• I am considering starting a small, "coffee can" position in the company.

I look for companies that generate consistent free cash flow and that can reinvest cash at a high rate of return. AppHarvest (APPH) does not fit the bill in its current state. The company only started to generate revenue in 2021 and is years away from generating free cash flow. APPH's management projects appealing unit economics and a long runway for future growth. If management's projections are accurate, in five years APPH will be generating over $100mm in annual free cash flow and be able to reinvest 100% of that cash at a rate of return over 15%. APPH's business model is unproven but I would be excited to own shares in a company with their projected return profile.

What is AppHarvest?

APPH is an indoor farming company based in Appalachia. The company grows tomatoes in a 60-acre indoor farm located in Morehead, KY. By growing their produce indoors, APPH is able to avoid using pesticides, recycle water, and optimize the controlled environment for higher crop yields. APPH can grow 365 days a year and crops are protected from adverse weather events. The company reports that it can produce yields as high 30x those of conventional outdoor farms while using 90% less water and a fraction of the soil and fertilizer. APPH sells exclusively to Mastronardi Produce Limited, another indoor farming company that has an extensive distribution network across the United States.

APPH is a new company, and only began harvesting from their Morehead facility this year; there isn't much data yet on their operational metrics. As of Q1, the company had about $300mm in cash on their balance sheet, but APPH is investing heavily into building additional farms. There are two farms currently under construction in KY and six additional sites have been identified as future farm locations. APPH's goal is to have 12 farms completed or under construction by the end of 2025. A standard 60-acre facility costs about $120mm to build and APPH estimates that a fully functional farm can bring in annual revenues above $40mm with gross margins as high as 40% and EBITDA margins around 35%.

(Source: Analyst Presentation)

Management raised facility EBIDTA estimates to over $23mm on the Q1 conference call, with the excess coming from increases revenue and lower input costs. Some of this upward revision is also due to the acquisition of robotics company Root AI, which management expects to improve farm efficiency and automation in the future.

Putting together the farm unit economics and the target number of farms, five-year projections look like this:(Source: Analyst Presentation)

APPH has a market cap of $1.2 billion. If the projections above are accurate, APPH will be generating more than $100mm in free cash flow by 2026 and have a proven, profitable model that they can leverage to build more farms with an expected cash return above 15%. $1.2 billion is a cheap enough price to pay for a company with that return profile.

Let's Take Management's Projections at Face Value; How Much Should We Pay For APPH?

The big question is: Are management's estimates accurate? I will talk more about this risk later in the article, but for now let's say that the future plays out exactly as management projects. In this scenario, what would be a fair price to pay for APPH shares today? Using company estimates, we can put together a rough 5-year DCF. I am going to use a 15% discount rate in my equation. This might be controversial, but there are a number of other companies that I own that I expect to return at least 15% a year. If I am going to tie up capital in APPH while I wait for management to execute their plan, I am going to treat the opportunity cost as 15% a year. The results look like this:



The netted cash amount is inconsequential for just five years. In the scenario where management's estimates have been accurate, the company would be in a great position at the end of 2026. They have a proven business model, are generating ample free cash flow, and could continue to expand their operations by building more farms. I think a multiple of 25-30x FCF is reasonable in this scenario, resulting in a market cap of between $1.4-$1.6 billion and a share price between $14-$16. Due to a fairly steady decline in APPH's share price over the last month, a $14 price target is a 16% premium to the current price and $16 would be a 33% premium. For this scenario, I'll split the difference, slap a $15 price target on the stock, and estimate the company is undervalued by 25%.

The Market is Skeptical

Using management's estimates and my DCF assumptions, my "base case" price target for APPH is around $15/share. Despite some initial excitement about the company when it came public via a SPAC, the market is skeptical about this base case:(Source: Seeking Alpha)

APPH is trading more than 70% below its 52-week high and has significant short interest; why might the market be pessimistic about APPH's future? I think the market has two main concerns. First, APPH is only just beginning their operations; the unit economics and long-term growth plans presented by management are just projections at this point. Perhaps the farms will have higher maintenance costs than expected or produce a lower yield over a prolonged period. Interest rate changes could make future expansion projects more expensive. APPH might incur greater than expected SG&A costs. With no operating history, investors are forced to rely on management estimates or make their own projections with limited information. In this case, uncertainty about the future works against APPH's share price in the short term.

Secondly, despite their advanced indoor farm technology and investments in artificial intelligence software, at the end of the day APPH sells commodity products (tomatoes and eventually other produce). It is hard to find a convincing competitive advantage that is unique to APPH that will help them stand out in the market place. There are dozens of other indoor farming companies in various stages of development and production, so APPH's technology isn't unique. Companies like Plenty, AeroFarms, and Local Bounti come to mind, but there are many others as well. APPH's location (Kentucky), cited by the company as a large competitive advantage, will be diminished by the growth in indoor farming. Kentucky might be closer to New York than Mexico or California, but if other companies have the ability to start up small urban farms (like Plenty), then in not too many years I could see more farms popping up closer to major urban areas and reducing APPH's location advantage. SA author Jamie Louko recently did a deeper dive on APPH vs the competition in this article, and I think he brings up good points, especially around APPH's scale and progress in building their farms and securing funding for future work. I'm not sure the market is convinced these advantages will be enough, especially in today's market where traditional farming remains the primary competition.

Investment Thesis (and Risks)

Is the market right to be skeptical about APPH's future, or is the market being short-sighted and creating a favorable investment opportunity? I think the answer to both questions is yes. On the one hand, it is reasonable to remain cautious about APPH's unit economics until the company has been operating multiple farms for multiple years. Without a strong unit economic base, I see limited downside protection for investors. APPH still has a sizable cash position on their balance sheet and owns their one operating farm, but much of the cash is already allocated to completing their two in-progress farms, and their existing farm won't be of much value if the unit economics end up being a lot worse than anticipated. APPH needs to complete more than three farms to overcome their overhead costs, so their long-term success is going to be dependent on a successful progression of new farm construction. New farm construction will be impacted by the future availability of credit and/or the company's share price (if they decide to an equity raise). Finally, APPH would be negatively impacted by short-term drops in vegetable commodity pricing. Tomato pricing has been relatively stable over the last 15-20 years, but swings of 15-25% or more have happened regularly and will likely continue to happen. An APPH investment has real risks that the market is keenly aware of.

On the other hand, I see a lot to like about the company if management is able to execute on their plans. In this scenario, APPH is only a few years away from consistent cash flow generation and will have a long runway for reinvestment at high rates of return. It is rare to find a company today that can reinvest 100% of their free cash flow to grow their business; often companies resort to paying a dividend or buying back shares with excess cash. These outcomes are "fine" for investors, but aren't going to generate the same 15-20% ROI that APPH would be able to get from additional farm construction. The most optimistic outlook makes me think of investing in Walmart or McDonalds in their early stages, when they were building new stores or opening new franchises at a brisk pace and reaping solid returns on those investments.

I can also envision scenarios where APPH makes an unexpected leap forward and expands into an adjacent industry. Company president David Lee made a comment on the Q1 conference call that suggested he sees the potential of their in-house AI and robotic solutions to be licensed to other companies. This would provide another source of high-margin revenue. He even went as far as to say that APPH's solution could be what "AWS is to Amazon" (source). APPH's investment in Root AI shows their commitment to solving technological problems presented by indoor farming and to continuing to optimize their day-to-day operations. If APPH expands into a true tech-focused company that is able to build a platform of tools that other future companies will want to use, that would be a huge and unexpected win for the company. I would take this projection with a huge grain of salt and say it is unlikely to materialize, but I think APPH's technology has value and at least has the potential to be monetized in the future.

Conclusion

An APPH investment is a departure from my usual style; I tend to focus more heavily on protecting against the downside than shooting for home-run returns with a favorable risk/reward ratio. That being said, I see APPH as an intriguing opportunity. APPH's potential to invest 100% of ample free cash flow at high rates of return is the most appealing part of this equation, and after the slow fall of the company's share price I think today's market cap looks fairly reasonable. Even with a 15% discount rate APPH is trading slightly below "fair value", assuming management estimates are close to reality. If I were to invest in APPH, I would make it a small portfolio position and plan on holding it "forever" to let the long-term investment thesis play out.

Top 4 Vertical Farming Stocks

By Rob Otman

Originally posted May 26, 2021

As the world’s population grows, there are more mouths to feed. This has presented some big challenges in agriculture. Although, we’ve continued to innovate and overcome. There have been some great investing opportunities and vertical farming stocks are up next.

In general, farmland has been a great area to invest. To help explain why this is the case, here’s a quote from Mark Twain…

Buy land, they’re not making it anymore.

That’s been a good rule for investors to live by. Although, we’re now managing land in much different ways. New forms of precision farming are taking root and crop yields are increasing. On top of that, we now have the technology to grow produce more efficiently indoors.

To benefit from these big trends, you can check out this list of the top agriculture stocks. And there’s a little overlap with the list of vertical farming stocks below. The companies on this list are delivering some unique farming products and solutions…

Top Vertical Farming Stocks

• AppHarvest (Nasdaq: APPH)

• Scotts Miracle-Gro (NYSE: SMG)

• CubicFarm Systems (OTC: CUBXF)

• AeroFarms (Nasdaq: ARFM)

AppHarvest

AppHarvest has a few of the largest indoor farms in the U.S. There are two 60-acre indoor farms. One is outside Richmond, Kentucky and the other is in Morehead, Kentucky. On top of that, the company has another 15 acre indoor farm in Berea, Kentucky.

With these farms, AppHarvest is working to cultivate fresh fruits, veggies, and leafy greens. It’s still early stages but the potential is huge. The company is using conventional agricultural techniques, along with cutting-edge technology. Without that, it wouldn’t be possible.

One big benefit to this vertical farming stock is sustainability. The indoor growing makes it climate-resilient and there’s no agricultural runoff. It also uses up to 80% less water than traditional agriculture.

Scotts Miracle-Gro

As far as vertical farming stocks go, Scotts Miracle-Gro isn’t a direct play. It has a wide range of products and services. Although, it has made some big strides into precision gardening and hydroponics. Both are vital for growing plants vertically indoors.

In 2018, Scotts Miracle-Gro announced the acquisition of Sunlight Supply Inc. It’s a hydroponics supplier and the deal came in at $450 million in cash and stock. In 2020, Scotts also acquired AeroGrow International, a hydroponics maker.

Scotts Miracle-Gro has many reputable brands but it’s not resting on its laurels. The company is beefing up its indoor farming products. It has more than 100 on-staff research scientists, specialists, and engineers, as well as partnerships with leading academic institutions.

This helps make Scotts Miracle-Gro one of the top vertical farming companies. It’s well-positioned to grow and caters to both small and large growers.

CubicFarm Systems

CubicFarm Systems points out that 1.3 billion tons of produce rots in transport every year. We’re shipping food great lengths but with modern technology, that’s not necessary. CubicFarm is building and selling automated growing machines. They’re used for fresh produce, nutritious livestock feed, and plant propagation.

CubicFarm also uses hydroponic technology. It provides complete indoor agricultural systems. The company also has vertical farm consultants. They help provide research and solutions for clients. On top of that, CubicFarm has an experienced leadership team.

If you decide to invest in CubicFarm stock, it’s a smaller Canadian company. It’s headquartered in British Columbia and its stock trades on the Toronto Stock Exchange (TSX). Although, you can buy shares in the U.S. over-the-counter (OTC) markets.

AeroFarms

There’s not much of a track record with AeroFarms, at least when it comes to trading publicly. This company is soon going public via a SPAC. To learn more about that process, feel free to click on that link.

Until this SPAC transaction closes, investors can buy into Spring Valley Acquisition Corp. (Nasdaq: SV). Once it closes, those shares will convert to AeroFarms with the ticker ARFM. This creates a unique opportunity to buy one of the best vertical farming stocks…

AeroFarms was founded in 2004 and is a world leader in vertical farming. It’s helping to solve issues from population growth, water scarcity, arable land loss, and supply chain risks. AeroFarms also achieves up to 390 times greater productivity per square foot versus traditional farming.

To accomplish this, AeroFarms takes a data-driven approach. Its plant scientists monitor millions of data points every harvest. The company has also gained some protection with patents.

Buying Vertical Farming Stocks and New Opportunities

The companies above give great exposure to innovative farming. Indoor growing will continue to expand, along with the world’s population. The push for green stocks and sustainability is helping as well.

Advancing technology is making this a reality. Some costs are dropping and output for produce is increasing. On top of that, quality control is becoming more fine-tuned. Indoor growing is also helping reduce food supply chain issues.

As a result, the vertical farming stocks above might see some high returns ahead. And whether you invest or not, you’ll likely benefit from these companies.

If you’re looking for even better investing opportunities, consider signing up for Manward Financial Digest. It’s a free e-letter that’s packed with investing insight. The founder and expert behind it, Andy Snyder, delivers big ideas that are easy to digest.