Some of the best vertical farming stocks have been on a sustained decline. The reasons for the deep correction include cash burn and questions about the potential for scaling the business. The correction has resulted in vertical farming stocks trading at attractive valuations.
I believe that beyond the near-term concerns, the long-term outlook for vertical farming is bright. Some of the key reasons include water scarcity, food shortage and sustained population growth. According to the World Wildlife Fund, two-thirds of the world population are likely to face water shortage by 2025. Also, hunger levels have remained high globally and food shortage will remain a concern.
One way to address these challenges is investment in vertical farming. This farming method requires significantly less water than traditional farming. Furthermore, the crop yield is better than traditional farming methods.
Estimates indicate that the vertical farming market is expected to touch $31.15 billion by 2030. This would imply a CAGR of 25.2% through this period. Clearly, it’s a good time to invest in some of the best vertical farming stocks.
Here are the four best vertical farming stocks that are worth considering after a deep correction:
|HYFM||Hydrofarm Holdings Group, Inc.||$3.26|
|VFF||Village Farms International, Inc.||$2.76|
Best Vertical Farming Stocks: AppHarvest
AppHarvest (NASDAQ:APPH) stock has mostly remained sideways year-to-date. It seems that the worst of the correction for APPH stock is over. Considering the growth plans, I would rank the stock among the best vertical farming stocks.
As an overview, the company is building some of the largest indoor farms in Appalachia. For first quarter (Q1) 2022, the company reported 125% revenue growth on a year-over-year basis. Also, for the full year, the company has guided for mid-range revenue of $28 million.
It’s also worth noting that with the opening of three new farms in the second half of 2022, the growth outlook is bright for 2023. Amidst these positives, cash burn is a near-term concern. The investment in new farms in 2023 is subject to fundraising. That’s one reason the stock remains depressed.
However, considering factors of water scarcity and global food shortage, funding the business is unlikely to be a challenge. I would bet on APPH stock trending higher from oversold levels.
Hydrofarm Holdings (NASDAQ:HYFM) has plunged in the last 12 months. However, there seems to be value in the stock at current levels.
Hydrofarm is a manufacturer and distributor of controlled environment agriculture equipment and supplies. For 2021, the company reported 40% growth in net sales on a year-over-year basis.
It’s also worth noting that between May and November 2021, the company pursued five acquisitions. This provides top-line growth visibility for the current year and 2023.
Besides the controlled environment agriculture growth, the company also stands to benefit from the potential legalization of cannabis. It’s likely to translate into higher equipment sales.
Another point to note is that Hydrofarm reported adjusted EBITDA of 6.2% and 9.8% in 2020 and 2021 respectively. For the current year, adjusted EBITDA margin is expected in the range of 11% to 12%. With operating leverage and merger synergies, margin expansion is likely to sustain.
Overall, Hydrofarm believes that there is a total addressable market of $18 billion by 2026. This leaves ample scope for growth and value creation.
Best Vertical Farming Stocks: Agrify Corporation
Agrify Corporation (NASDAQ:AGFY) is another name to add among the best vertical farming stocks. The penny stock seems oversold and poised for a reversal rally as top-line growth sustains.
For Q1 2022, Agrify reported revenue growth of 271% on a year-over-year basis to $26 million. For the same period, the company’s contractual backlog increased by $77 million.
The company has been aggressively expanding its vertical farming units. To put things into perspective, the company already has $84 million in annual recurring revenue. Further, the 10-year contractual backlog stands at $923 million.
In terms of concerns, cash burn has accelerated significantly. However, as recurring revenue growth sustains, there is visibility for long-term cash flows. It’s worth noting that in April 2022, the company signed a vertical farming agreement with Greenlight Cannabis. With potential Federal-level legalization of cannabis in the United States, the stock is also a proxy cannabis play.
Overall, after a correction of 80% in the last six months, AGFY stock seems attractive. A reversal rally seems likely if growth sustains and the cash burn is arrested.
Village Farms International
Village Farms (NASDAQ:VFF) is another attractive name to consider among vertical farming stocks. Like most vertical farming stocks, VFF stock has also been in a correction mode. However, I expect some consolidation at current levels before a rally.
As an overview, the company’s management has more than 30 years of experience in controlled environment agriculture. The company claims to be using 97% less land than outdoor growing. The yield is also 20x to 30x as compared to outdoor agriculture. At the same time, 86% less water is used as compared to outdoor cultivation. These factors make Village Farms attractive.
The company is yet another proxy for exposure to the cannabis segment. Its subsidiary Pure Sunfarms is among the largest cannabis growers in the world. With positive adjusted EBITDA, the low-cost cannabis producer is a potential long-term value creator. In the cannabis segment, the company plans expansion in the U.S. upon Federal-level legalization. Further, entry into Europe is also planned.
Overall, Village Farms has two potential high-growth segments. As top-line growth accelerates, VFF stock is likely to trend higher.
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.