What happened

Shares of AppHarvest (APPH) have soared as much as 61% this week, according to data from S&P Global Market Intelligence. The indoor tech farming company is now up an astonishing 271% year to date after a horrendous performance in 2022. The stock is likely moving higher because of a major production announcement for its new facilities, along with a short squeeze on its depressed stock.

So what

AppHarvest is a vertical farming start-up that raised money during the COVID bubble at an absurd valuation. The company is making tomatoes, cucumbers, and other produce in technologically advanced indoor farming systems, which will supposedly lead to better products grown in a more efficient manner.

During the bubble period, investors cheered on this innovation, sending the stock higher during its first few months as a public company. But throughout late 2021 and early 2022, the stock started crumbling once people realized AppHarvest didn't have much of a business model.

There are some signs of life for this struggling agricultural start-up. A few days ago, the company announced that all four of its facilities across the Appalachians are producing commercial shipments, which should lead to higher sales and better financial health. Over the last 12 months, the company has burned $270 million in free cash flow while generating just $13 million in revenue. It will need to grow its revenue, and quickly, in order to achieve positive cash flow.

On top of these business developments, AppHarvest's stock is heavily shorted, with a short interest estimated to be above 20% as of this writing. Highly shorted small-cap stocks can lead to volatile trading when a short squeeze occurs. A short squeeze happens when short sellers decide to buy back the stakes they were loaned in the stock, which can drive up share prices rather quickly. This is likely occurring with AppHarvest's stock right now.

Now what

Regardless of where the stock heads in the short term, AppHarvest is an incredibly risky business to put your money in. The company is hemorrhaging money on very little revenue and is in a commodity business (fruits and vegetables) with an unproven strategy. Even if it doubles or quadruples its revenue generation in 2023, the company will probably still lose a boatload of money, given how high its fixed costs are. 

Don't get caught up in this bear market rally. Avoid buying shares of AppHarvest until it proves it can generate positive cash flow.