Combining modern agriculture with bleeding-edge technology, AppHarvest (APPH) grows produce indoors with the help of AI and robotics. The company saw an upsurge in sales in Q2 and has ambitious plans to rapidly expand operations.
In order to reach its growth objectives, AppHarvest must first contend with supply chain challenges and inflationary pressures, all while managing its mounting debt.
Ambitious growth objectives
AppHarvest differentiates itself from traditional agribusinesses with its technology. The company's state-of-the-art facilities embody the latest in controlled environment agriculture (CEA) and can harvest crops nearly year-round, minimally impacted by weather events or seasonal changes.
Fine-tuning carbon dioxide levels, temperature, humidity, and lighting, these technologies optimize both crop yields and produce quality. AppHarvest's customers, including grocery chains and restaurants, appreciate the consistent volume and quality of produce that indoor agriculture provides.
With its technology in place, AppHarvest has now focused on expansion, aiming to quadruple its number of farms by the end of 2022. Currently growing a selection of tomatoes from its flagship facility, AppHarvest will utilize these three new farms to diversify its offerings with salad greens and berries.
In the company's Q2 earnings release last month, it cited "strong progress" on growth initiatives, with each of the three new facilities more than 84% complete. The company anticipates all three farms to begin operations by year-end, barring any major supply chain interruptions.
Growth is expensive
Funding construction of massive high-tech indoor farms is, as you might expect, extremely costly. This year alone, AppHarvest expects to spend somewhere between $140 million and $150 million on its new facilities.
With expansion-related debt mounting, the company will have to streamline operations, improving efficiency and yields however possible. While AppHarvest's ratio of premium-grade tomatoes increased in the second quarter, thanks to productivity improvements and enhanced training protocols, the company reported a quarterly net loss of $28.7 million.
But this is actually an improvement over Q2 of last year, when the company reported a $32 million net loss. Aside from optimizing day-to-day operations, AppHarvest increased its number of direct shipments by more than 5%, saving a significant amount on transportation costs. Besides growth-related expenses, industry-wide concerns, including potential supply chain disruptions and high inflation, still loom for U.S. produce growers.
Signs of progress
With its improved labor and quality control, AppHarvest had a solid second quarter. The company reported net sales of $4.4 million, compared with $3.1 million in Q2 of last year. Adjusted for price per pound of tomatoes, this marked a 39% increase in sales year over year. Aside from internal improvements, higher-priced tomato varieties and the overall market for tomato pricing also contributed to the sales jump.
In July, the company secured a $50 million USDA-backed loan to support completion of its berry farm in Somerset, Kentucky. Providing some breathing room, this funding frees up additional cash for the company while helping to pay down a prior loan with JPMorgan to fund the initial construction phase.
Once running, CEO Jonathan Webb expects AppHarvest's new farms to rapidly expedite revenue growth. Webb sees the new facilities helping the company become financially self sufficient and also attracting new investments.
The company expects to more than double its net sales this year, anticipating at least $24 million versus last year's $9.1 million. If AppHarvest can complete its new facilities on time while continuing to improve productivity in existing operations, an investment in this agricultural tech stock could continue to mature and ripen for many years to come.