The best vertical farming stocks have been in a deep correction mode.
Unexpected weather conditions and shortage of water have affected the global agriculture industry. In the coming decades, the food crisis is likely to aggravate. As the world looks for a solution, vertical farming has gained traction because of its robust yield and significantly lower use of water. However,
This is largely on the back of cash burn and skepticism on scalability.
I believe that it’s a good time to consider some exposure to the best vertical farming stocks. Talking about the industry outlook, the global vertical farming market is expected to grow at a CAGR of 22.9% through 2030. Some of the early movers in the industry are poised to benefit from positive tailwinds.
The opportunity is beyond the decade. It’s estimated that the global population will swell to nine billion by 2050. Further, “two out of every three people are expected to live in urban areas.” It’s vertical farming that can cater to this demand and reduce the distribution chains.
With this big opportunity for growth, let’s talk about four of the best vertical farming stocks that can be considered at current levels.
AppHarvest (NASDAQ:APPH) stock trades at around 84 cents and looks attractive after a deep correction. From current levels, the downside seems capped and the upside potential is meaningful.
AppHarvest appointed Tony Martin chief operating officer. Martin is an industry veteran and as AppHarvest scales-up operations, the induction is likely to create value.
Towards the end of 2022, AppHarvest completed a $127 million sale-leaseback agreement for Berea farm. With this, the company has a four-farm network with 165 acres under vertical farming. AppHarvest is positioned for strong revenue growth once the farm network is fully operational.
On the flip side, AppHarvest has already guided for adjusted EBITDA loss in the range of $67 to $72 million for 2022. Further equity dilution might be on the cards in 2023. However, this factor is discounted in the stock. I also expect the cash burn to narrow with operating leverage in 2023.
Hydrofarm Holdings (HYFM)
Hydrofarm Holdings (NASDAQ:HYFM) is another interesting bet among vertical farming stocks. As a manufacturer of controlled environment agriculture equipment, the company is positioned to benefit from industry growth. The company believes that it currently has a $12 billion addressable market globally.
It’s worth noting that for 2022, Hydrofarm has guided for sales of $330 to $347 million. With the stock trading at a marker-capitalization-to-sales ratio of 0.2. This is a clear indication of undervaluation.
For 2023, Hydrofarm is focused on cost control and better working capital management. As cash burn declines, HYFM stock is likely to trend higher. As a matter of fact, Hydrofarm reported positive free cash flow of $5.2 million for Q3 2022.
The company is also focusing on higher-margin brands and SKUs. This will also support EBITDA margin expansion. The worst might therefore be over for HYFM stock after a downside of 94% in the last 12 months.
Village Farms International (VFF)
I would include Village Farms (NASDAQ:VFF) in the list of best vertical farming stocks. Like all vertical farming stocks, VFF stock has also been in a deep correction mode. The selling however seems to be overdone.
As an overview, Village Farms claims to have more than 30 years of experience in the vertically integrated controlled farming segment. The company is focused on high-value plant-based consumer products. Additionally, Village Farms has also made inroads in the recreational cannabis business.
For Q3 2022, Village Farms reported sales of $35.5 million in the agriculture segment. In the U.S. and Canada cannabis segment, sales were $35.5 million.
Village Farms is therefore well diversified with a presence in two high-growth businesses. With the possibility of federal-level legalization of cannabis in the United States, the company has an impending growth catalyst.
On a consolidated basis, the company reported EBITDA-level losses. However, the cannabis segment has reported positive adjusted EBITDA on a consistent basis. With operating leverage in the fresh produce business, losses are likely to narrow.
Agrify Corporation (AGFY)
Agrify Corporation (NASDAQ:AGFY) is a micro penny stock and is a high-risk exposure. The stock has plunged further after the recent $8.7 million public offering of shares.
Agrify Corporation offers vertical farming units along with software-as-a-service. As the demand for vertical farming increases, the sale of farming units is likely to accelerate. Agrify is also a provider of hardware and software solutions for the cannabis industry. Like Village Farms, a diversified business is likely to support growth.
In terms of positive catalysts, the company has received an order from Prairie State Cannabis LLC, LowKey LLC, among others for vertical farming units. Initially, the company will be providing 56 VFU to each customer. As these orders are executed, sales are likely to improve.
An important point to note is that the agreement includes recurring SaaS and production success fees. With more such contracts in the coming years, recurring revenue is likely to get a boost. This will help in EBITDA margin expansion.
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.