Two Indoor Farming Stocks For FoodTech Investors

First it came for electric vehicle companies, and we did nothing. Then it started to swallow the commercial space industry, and we did nothing. Now there are hints of a new target – indoor farming companies. Will it be different this time? Probably not. In fact, it’s the same old story: An emerging technology sector with a handful of really well-funded startups that are burning through greenbacks and have yet to make a dime turn to special purpose acquisition companies (SPACs) for a shortcut to the public markets and a bundle of free cash. Everyone lives happily ever after (assuming we’re not including retail investors).

The Green New Deal

It’s not surprising to see blank check companies making a bull run at indoor farming, as green technology has been a favorite target of these reverse mergers. One reason is that many of these ventures require huge amounts of capital to scale manufacturing and production. The new administration is also bullish on the sector, which has greentech investors under the impression that anything with the sheen of being climate friendly can’t fail. Conversely, there’s also the allure of high-risk and high-reward potential with the latest gee-whiz technologies that seem too cool for school. 

Indoor farming certainly meets the criteria. Some of these farms require massive footprints, even the vertical indoor variety, along with industrial-sized equipment and electronics. Every founder is all about disrupting traditional agriculture, claiming his or her company only needs a few LEDs and a couple of gallons of water to yield as much produce as all of Kansas. Cool technology? Check: Indoor farms employ sensors for Internet of Things (IoT) networks, artificial intelligence to make everything smarter, and even a few robots to pluck tomatoes off the vine at peak freshness.

Vertical indoor farm.
Vertical indoor farm. Credit: AeroFarms

Last year, we noted that indoor farming startups had hit something of a funding drought through the first half of 2020. The pace picked up a bit with vertical farming startups Plenty and Infarm both raising more than $100 million in venture capital in the second half. We’ll see how long either remains private given rivals AppHarvest and AeroFarms have opted to SPAC out into the public markets. Let’s take a closer look at what these two indoor farming companies have to offer.

High-Tech Greenhouse

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The first to jump on the SPAC crazy train was AppHarvest (APPH) out of Kentucky, which plays up its Appalachian roots and its high-tech greenhouses. Founded in 2017, the company raised about $142 million through August of last year, when it picked up another $28 million. The company has attracted its share of celebrities, including Martha Stewart and a dude named JD Vance who co-founded Narnia Narya, a new venture capital firm backed by the bloodthirsty billionaire Peter Thiel. Vance’s claim to fame is a best-selling memoir, “Hillbilly Elegy,” which was recently turned into a movie about a family that finds oil on its land and moves to California. At least that’s what we assume it’s about.

In late 2020, AppHarvest announced a merger with blank check company Novus Capital Corp. that would value the company at about $1 billion. The transaction wrapped up earlier this year and AppHarvest started trading under its new ticker on the Nasdaq beginning February 1. Predictably, the stock soared out of the gate before diving by more than -50% since its premiere. For reasons nobody can discern, AppHarvest is currently trading at a huge premium – $16.40 – more than +64% above what institutional investors were willing to pay just months ago.

We’ll dive a bit more into the financials shortly. First, let’s take a look at what AppHarvest is actually doing to reinvent the humble greenhouse.

The Value Proposition from AppHarvest

AppHarvest claims its high-tech indoor farms are designed to use 90% less water – all of which is sourced recycled rainwater – with yields that are up to 30 times higher compared to traditional agriculture on the same amount of land. Its $125 million flagship facility in Morehead, Kentucky is expected to produce 45 million pounds of tomatoes annually from about 720,000 tomato plants on 60 acres of land. The company has two more facilities under construction in Kentucky, including another 60-plus acre indoor farm outside Richmond and a 15-acre facility to grow leafy greens in someplace called Berea. The plan is to have a dozen indoor farms in operation throughout Kentucky and Central Appalachia by the end of 2025.

Technology for AppHarvest
Credit: AppHarvest

Powering these facilities is an array of technologies. A hybrid lighting system uses glass-diffused sunlight, energy-efficient LEDs, and high-pressure sodium-growing lights that double as a heat source during cooler months. The LED system, which is 40% more efficient than typical lighting, provides a bit of mood lighting with blue and red lights that provide just the right combo for photosynthesis. Sensors and cameras record and analyze high-quality plant images to identify pests before they become a problem. Behind the scenes, AI predicts crop yields to help with all of the downstream planning. And just this month, AppHarvest acquired Root AI, a startup out of Massachusetts that has developed a robotic universal harvester called Virgo, for $60 million. Virgo uses cameras and infrared lasers to scan crops and determine when they’re ready to pick, as well as determine the most efficient route to grab the crop for the robotic arm and gripper.

Robot picks tomatoes off the vine.
Virgo the Harvester. Credit: Root AI

The company has money to spend after it closed the SPAC deal, which brought in $475 million. We’re still waiting for the first official SEC quarterly filings to get a fuller picture of the company’s financial health, but AppHarvest did reveal that before this year it was pre-revenue and had lost $17.4 million in 2020. The company harvested its first pesticide-free, non-GMO tomatoes earlier this year. Currently, AppHarvest anticipates sales of $20 million to $25 million in 2021. We don’t invest in pre-revenue companies, so we’ll check back in 2022 when we would expect to see that they’ve grown and sold at least $20 million in product which proves they can operate at scale with a demand that matches their supply. Unlike tomatoes, money doesn’t grow on trees.

A Vertical Farming Stock

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Getting some meaningful sales numbers is also a priority for Newark, New Jersey-based AeroFarms, a vertical farming company that’s been around for 17 years. The company has raised a total of $238 million in disclosed funding. That doesn’t include an additional investment by the United Arab Emirates to build a 90,000-square-foot indoor vertical farm in the capital of Abu Dhabi. AeroFarms was one of four companies slated to receive part of a $100 million investment from a new government-sponsored accelerator program. In March, the company opted to SPAC into the public market by merging with blank check company Spring Valley Acquisition Corp. (SV). While there had been some build up around the stock price prior to the announcement, there was barely a blip when the news broke about the potential merger, which will provide $317 million in cash to AeroFarms if the deal goes through. The good news is that you can buy shares at roughly the same price institutional investors did. The bad news is that you may not want to.

The Value Proposition from AppHarvest

The company’s longevity certainly counts for something, as it has spent more than 15 years developing its vertical farming technology and amassing a vast library of data about what works and what doesn’t. AeroFarms claims it can achieve up to 390 times greater productivity per square foot annually versus traditional field farming, while using up to 95% less water and zero pesticides. Here’s a look at some of the key features of its agSTACK System:

AeroFarms technology platform.
Credit: AeroFarms

AeroFarms has grown more than 800 different crops, but it has focused commercial operations on leafy greens and microgreens. Translation: It sells mainly to the Whole Paycheck crowd, and its products are already sold in more than 200 stores in the Northeast. While the rich need their greens like anyone else, the market focus on high-end produce sort of undermines the company’s high-minded claims to be helping solve the global food crisis. (A cup of microgreens contains about 50 calories, while a large tomato from AppHarvest has even less.) Regardless, the market demand appears to be strong. AeroFarms is investing $42 million to build its largest U.S. vertical indoor farm in Danville, Virginia and has some pretty ambitious expansion plans:

Geographic market expansion plan for AeroFarms
Credit: AeroFarms

The company also has plans to expand beyond leafy greens into another high-value crop that usually requires tons of pesticides to grow – berries. AeroFarms has already grown more than 50 varieties of strawberries to date, and claims its best varieties contain 1.5 times the concentration of sugar. In fact, the vertical indoor farming company plans to leverage its expertise in plant genetics and breeding as one of several future service offerings:

Market expansion by AeroFarms.
Credit: AeroFarms

Of course, AeroFarms has a long row to hoe, as it scales to larger operations. Revenues have been nominal to date, with the company projecting merely $4 million in revenue in 2021. For a company that makes as much noise as they do, AeroFarms isn’t producing the sort of revenue numbers we’d expect for a “leader in the world of vertical farming.” Like most SPACs, hockey stick growth is right around the corner. For indoor farming investors, let’s hope that’s the case.

Conclusion

Both indoor farming and vertical farming have been making promises that have attracted billions in venture capital funding. We’ve always questioned if these business models can scale, and in order to do so, we believe they need to compete on price. If container farming isn’t profitable for the people of Nauru, we’re hard-pressed to believe it can be economical elsewhere. Each method of vertical farming needs to find a product-market fit. Evidence of that will be revenues that start to surpass eight digits.

Of these two indoor farming companies, AeroFarms seems to have bigger ambitions, with the overseas R&D vertical indoor farm in Abu Dhabi and expansion into other markets including plant-based pharmaceuticals and genetics. Plus, the pre-merger price is hovering right around the initial IPO offer – assuming that was a fair valuation, to begin with. Since SPACs are now forming cliques, don’t be surprised to see other indoor farming companies backing their assets up into SPACs.

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