How Has AppHarvest Fared Since Its IPO?

Thinking about investing in AppHarvest (APPH)? With shares trading down considerably since the company's initial public offering (IPO) via special purpose acquisition company (SPAC) in 2021, you might be considering whether or not this is a good stock to buy at a bargain right now. In this segment of Backstage Pass, recorded on Dec. 13, 2021, Fool contributors Jason Hall and Danny Vena discuss. 

Jason Hall: In the second quarter, which was really its first quarter generating revenue with its first crop season, $3.1 million in sales. That fell to just over $540,000 in the third quarter. Partly a product of timing of crop rotation, at this point they have one facility that they are operating. Partly at the time, just a period of getting that second harvest, that second season going. But that's not it, that's not the only reason.

That first harvest was actually a disappointment, their yields were higher but the yield quality was far lower than expected they were really expecting to get a lot of grade one tomatoes and that didn't happen. As a result of getting lesser quality products than they were expecting they realized lower selling prices.

Their distribution costs were higher because you have to pre-plan for your packaging. They didn't have the right packaging for the lower-grade tomatoes, so their costs went up because they had to get new packaging that delayed their ability to get the products out to market.

Oh, by the way, it's a commodity product that they are selling. They are expecting to realize above-average prices because of all of the benefit of those other things. They think that they're going to be able to generate consistently the top tier of product quality, but they got hit with the lowest tomato prices in the quarter that we've seen in 10 years.

We talked about all the supply chain issues with everything else and tomatoes, there was an oversupply and prices were down. All of those things added up to really a disappointing beginning to their actual operations. That's a big reason the stock fell as much as it did. They also discovered that their operations and their management structure was really inefficient.

Too many layers of management, too many people and decision makers in between the products in making the right decisions. They made some changes there. They changed some of the incentives for all of their employees as a way to try to really align incentives for a high-quality production. 

Burning a lot of cash, you see on the slide on this page I wanted to show. Again, this is quarterly revenue so the quarter ended in July. That was the quarter with $3 million dollars in revenue, fell to half a million dollars.

Over the trailing 12 months it's burned $85 million in cash. When you have done $3.5 million in your first two commercial quarters and you're burning $85 million, something's got to give. What is that thing that's going to give and when is it going to happen? It has nine facilities that are planned. These are they're indoor facilities plan. They've got nine of them planned.

Only one is operating, two were about halfway complete, one's about a third complete. Their goal is to have those three operational by the end of 2022. The nine that they're planning, the goal is by the end of 2025 to have all of those up and running. What does commercial operation mean? A year from now their goal is to have four facilities producing products.

A lot of the revenue from those production if they get into production at the end of 2022, it's still going to be next, 2023 before they actually yield and produce any revenue from those products. The good news is they've got $222 million in cash at the end of the quarter, burning $85 million a year, they have sufficient cash to go a couple of more years to limp along as they bring these facilities up and they try to optimize their product. They've also taken on some debt. They haven't used all the debt yet, but they have $116 million in relatively new liquidity.

A smaller portion of that, I think $25 million of that is some unsecured debt and then the vast majority of that, $91 million of that is basically a construction loan with an 8% interest rate. Very high interest rate that should tell you a lot about where the business is in terms of the risk, looking at where the revenues are versus where their cash spend is; should tell you a lot about the risks. Market value right now it's $500 million market cap.

What's that? 40% you back out the cash and it's $300 million dollar value for the business. A lot of risks still here guys, on the good news is they have cash and so they can get to like a scaled-up business. But it's still a low-margin business. You're selling produce, it's all about volume. If they can get the volume, maybe there's some good money to be made, but it's just, I have a tough time seeing this as a highly profitable business. I love the idea but I struggle with whether or not this is going to be a market-beating business.

Danny Vena: I thought it was really interesting that you brought this up because I wasn't really hip to the idea of the vertical farming that is really starting to become more mainstream. I wasn't even aware of it until a piece that I did last week for about Walker & Dunlop and they had just set up one of the world's largest vertical farming operations inside of a building for another company. I think it was AeroFarms was the tenant. It seems that this has started without me being aware of it.

Hall: Well, it's been around for a long time. You look at the Netherlands, this is the second largest produce exporter in the world. It's almost entirely because of this technology that they pioneered. It just hasn't come to North America yet, so that's where it's new.