Investors should consider exposure to some of the best vertical farming stocks. Investment in water and agricultural commodities is likely to remain a key theme in the next decade. With global food and clean water shortage, there are challenges and opportunities. One such sub-segment that’s likely to grow in the coming years is vertical farming.
To elaborate, the global vertical farming market size was $4.34 billion in 2021. Through the decade, the market is expected to grow at a CAGR of 25.5%. This presents an attractive investment opportunity in vertical farming stocks.
While the industry growth outlook is robust, some of the best vertical farming stocks have plummeted in the last one year. The key reasons are cash burn, scalability and lower-than-expected growth.
Considering the growth outlook, the deep correction presents a good accumulation opportunity. In particular, some of the best vertical farming stocks have declined by 70% to 90% in the last 12 months.
Let’s look at four of the best vertical farming stocks and the reasons to be bullish on these names.
AppHarvest (NASDAQ:APPH) stock has continued to trend lower. It seems that APPH stock is likely to bottom out around current levels. With short interest at 18%, I would not be surprised if there is a short-squeeze rally.
For Q2 2022, AppHarvest reported net sales of $4.4 million. On a year-on-year basis, sales increased by 40%. With the company still at an early investment stage, cash burn is likely to sustain.
However, the key stock upside catalyst is the company’s significant expansion. Just to put things into perspective, the company is expecting to quadruple its farm footprint in 2022. This is likely to translate into robust top-line growth in 2023 and beyond.
For the expansion, AppHarvest expects to incur capital expenditures of $85 to $90 million. As of Q2 2022, the company reported $90.9 million in liquidity. Therefore, the company is fully financed through 2022. With these positives, APPH stock looks attractive at current levels.
Hydrofarm Holdings (HYFM)
Hydrofarm Holdings (NASDAQ:HYFM) stock has also plunged in the last 12 months. A key reason has been growth deceleration coupled with cash burn.
The long-term industry outlook is however positive. The deep correction provides an attractive entry opportunity. The company is a manufacturer of hydroponics equipment and supplies. For the current year, it expects sales in the range of $330 to $347 million.
Even amidst retreating sales, Hydrofarm Holdings has been in an aggressive acquisition mode. In the last few months, the company has acquired House & Garden, Aurora Innovations and Greenstar. These acquisitions will broaden the company’s product portfolio and boost growth in the next few years.
Hydrofarm has been leveraging for growth and acquisitions. The company has however been in compliance with all debt covenants as of Q2 2022. Once top-line growth accelerates and EBITDA break-even is achieved, debt is unlikely to be a concern.
Agrify Corporation (AGFY)
Agrify Corporation (NASDAQ:AGFY) stock is also among the best vertical farming stocks to consider. The stock is also a good proxy for exposure to the cannabis industry.
For Q2 2022, Agrify reported robust top-line growth of 63.5% to $19.3 million. For the full year, Agrify expects to generate revenue in the range of $70 to 75 million. At a market-capitalization-to-sales of 0.16, the stock seems deeply undervalued.
In June 2022, the company signed an agreement with Ora Pharm, a New Zealand-based cannabis company. Agrify will be supplying 20 vertical farming units as a part of the agreement.
The key point is that the company stands to benefit from the growth in the cannabis industry. This is in addition to the growth coming from alternative farming of other agricultural commodities.
Agrify already has an annual recurring revenue potential of $84 million from high-margin SaaS fees and production success fees. This is an indication of the growth potential in the next few years.
Village Farms (VFF)
With three decades of experience in vertically integrated controlled environment agriculture, Village Farms (NASDAQ:VFF) stock is worth considering.
Village Farms claims to use 97% less land than outdoor cultivation. At the same time, the company’s yield is 20 to 30 times higher per acre than conventional cultivation. The company also uses 86% less water than outdoor cultivation. With these key differentiating factors, Village Farms seems attractive.
Besides this expertise, Village Farms is also among the largest cannabis growers in the world. The company is among the lowest-cost producers of cannabis in Canada (indoor/greenhouse).
For the first half of 2022, Village Farms reported net sales of $51.6 million. On a year-on-year basis, sales increased by 25%. It’s worth noting that the cannabis business has reported positive adjusted EBITDA on a sustained basis.
Overall, with a presence in two high-growth business segments, Village Farms seems attractive. With economies of scale, its EBITDA margin is likely to expand and stabilize.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.