OK, so I should warn you up front that this teaser pitch is a little strange. It’s from the Motley Fool, in one of their “Investor Digest” emails that are typically just an excuse to send readers another ad.

And, of course, it’s “top secret” — this is what the email said that several readers forwarded:

“This edition is reserved for Motley Fool members like you who have proven their loyalty and dedication to the principles of Foolish investing, so I’d ask you not to share its contents widely.”

(I guess we’ve got plenty of “rule breakers” here in Gumshoedom, too)

But that’s not the odd part — the oddness is that this pitch is headlined as an “Undervalued 5G stock with 268X growth potential” … but the actual tease is in a totally different business whose actual connection to 5G, if any, is really a stretch. And it kind of makes me think that they left this “5G Stock Poised to Explode in 2021” bit in there from some previous email.

So anyway, it seems this is really an “Agtech” play, not a 5G one… and it’s not technically a recommendation from the Motley Fool service they’re adding, it’s a “radar stock” from their Extreme Opportunity: Next-Gen Supercycle portfolio service ($1,399 for the first year, no refunds)… which I guess basically means that it’s a watchlist idea that they think you should “vet”, not necessarily buy just yet.

But I’m curious, so I dug into the clues. The 268X bit is actually from the ad, not just a vestige of some earlier 5G pitch, this is where they include that info:

“268X(!) potential growth opportunity… This stock is situated in the unique Agtech industry, concentrating in large-scale controlled indoor farms… and while it made $25 million last year, their team predicts a $6.71 billion dollar market, and that’s just based off one of their core targeted opportunities.”

Yes, $25 X 268 is $6.7 billion. We’ll see what that number might mean in a minute.

What other clues do we get about this one? They tell us the size and rough valuation…

“….tiny $1.66 billion market cap… I was surprised to see this company only trading at 4.3x sales”

And drop some more clues about the company’s location:

“Situated in the heart of America, the company is heavily investing millions of dollars into new facilities to meet this demand. This includes 135 acres of indoor farmland that efficiently uses every inch of their properties through their tech-centric process for growing fruits and veggies.”

And apparently the 5G bit was not an editing error, because they throw this in:

“It’s hard for me to overstate how rare it is that you get a stock that’s this small…with the Next-Gen Supercycle team estimating this company be a part of the $17 Trillion 5G growth opportunity…and perfectly positioned to help feed the world….

“And with it comes a demand potential that could make you forget all about Apple tech and instead think about non-GMO apples (and other foods) this company will farm for mankind.”

So… 5G Agritech? Hoodat?

The quick and easy answer, without even pulling the Thinkolator out of the garage, would be AppHarvest (APPH), a controlled environment agriculture company that came public a few months ago through a SPAC merger, and which does indeed have a market cap near $1.6 billion.

But that “4.3X sales” bit is way off, so that slows me down a bit. AppHarvest hadn’t completed their facility or finished a harvest by late in 2020 (they harvested their first tomatoes in January), and didn’t have any revenue… and they’re forecasting just $20-25 million in sales this year (though as they add facilities, growth should be strong — more than doubling every year for a few years, according to their forecasts).

The “$6.71 billion” number does ring a bell for us, however — that’s how AppHarvest assesses the current value of the “fresh leafy greens” market, which has long been the most obvious product for indoor growing… though AppHarvest itself is starting with tomatoes and won’t be getting to greens, they expect, for a year or two.

135 acres? That’s not really a match yet, either, their first facility, in Morehead, KY, (an area that was desperately in need of economic development when I built Habitat for Humanity houses there 25 years ago, and it sounds like it remains so), has a 60-acre growing area (all tomatoes, 720,000 plants, first planting was back in October and the first harvest should be on Kroger shelves now)…

… but wait, there’s hope! It is a match in that they’ve also broken ground on two additional facilities, another 60 acres of growing area in Richmond, Kentucky for more tomatoes and other vine crops… and 15 acres in Berea, KY, for, yes, lettuce and other leafy greens, so that adds up to 135 acres. As of the SPAC deal presentation in December, the expectation was that those would be under construction next year, with another 240 acres in other locations in the initial planning.

So what on earth are they talking about with that “made $25 million last year” and the “4.3X revenue?” Well, I guess we can stretch a little bit to make that fit — $25 million is the top end of what they say they can make in revenue (not earnings) in 2021, so maybe they’re just a little off on that number, and, like pretty much all SPAC mergers, AppHarvest justifies its valuation by making five-year projections… so they think they’ll have 395 acres planted in nine facilities by 2024, and will make $387 million in revenue in 2025. $387 million in revenue at a valuation of 4.3X sales would, whaddya know, give them a market cap of $1.66 billion. Right about where they are right now.

Of course, the market cap might be far different by the time we get to 2025 — maybe they’ll sell more shares along the way, maybe the stock price will rise or fall in a meaningful way. But you have to start with something, and the last year’s crop of SPAC mergers have made the idea of investing based on 2025 numbers seem much more mainstream.

I don’t know what kind of assumptions they’re making about their construction costs, or about food prices or yields, but I would say, at least, that the progress for APPH will probably be much more predictable and linear than some of the high-tech SPAC mergers who are really making projections based on technology that hasn’t yet been commercialized — people have been industrializing agriculture for hundreds of years, and the act of planting, harvesting and transporting a tomato to market is much more predictable than inventing a new battery chemistry or selling a LiDAR system into a car that has not yet been designed.

AppHarvest is also a “certified B corporation,” a “public benefit” corporation — there aren’t many of those just yet, so it might help raise their profile, only three B corps are US publicly traded companies (insurtech company Lemonade (LMND), which pledges part of underwriting profit, if any, to charity, “ethical food” company Vital Farms (VITL), and Laureate Education (LAUR), which runs universities, mostly in Latin America).

AppHarvest says that the reliability and dramatically higher yield (30X higher) of indoor farming justify the costs of these facilities, as does the control of water (using 90% less than conventional farms) and chemicals and lower likelihood of contamination (no pests inside = no pesticides, and being inside also means e coli or other contamination is less likely).

Makes perfect sense… and this is clearly the most likely match — they even do lean on technology, including some robotic systems, even though we should be clear that there’s no particular “5G” leverage. Slower 4G and WiFi-type communication networks would work fine for these facilities even if they are implementing “Internet of Things” sensors for their water, lighting and control systems, and being a hair faster or with lower latency with 5G presumably isn’t going to matter much for a tomato that takes a few months to grow and ripen. I agree that controlled indoor agriculture is a very large potential market over time, really headlined by marijuana at this point, at least in the eyes of investors, but likely to become a bigger deal for food crops as well… but it’s not 5G that’s going to make it a large market, it’s water usage and efficiency and land use and import reduction and food quality that drive the bus.

I wouldn’t object to putting this one on the watchlist — fresh food, reduced pesticides and agricultural efficiency are all important trends, and while AppHarvest will never “own” the idea of indoor agriculture, there are lots of people building vertical farms for greens in cities and hydroponic tomato and pepper facilities all over the place, they do have a start on building a brand with their tomatoes and their public listing. It’s important to be very skeptical of SPAC revenue projections for 2025, though, so we don’t want to get that “4.3X sales” number into our head and start assuming this is “cheap” — if we stick with the one facility that is built, that’s expected to produce $20-25 million in revenue this year and consume $44 million in cash. So if you’re look at price/sales, it’s really at more like 60X sales right now.

They’re projecting that getting to $250 million or so in revenue will be enough to generate some free cash flow on an operating basis (if you ignore the capital and startup cost of building their new facilities), and they expect a steady state unlevered return, before financing costs, of about 13% from their current 60-acre tomato facility. That sounds pretty decent, though I don’t know what the standards in this industry might be, and we’ll see if they make that — if they can build all their facilities out on those terms, using their $465 million in cash (well, $280 million after buying that first one and buying a robotics/AI company just recently), that would probably mean a return of $50-60 million a year in EBITDA — which means that at $1.6 billion, we’re valuing this company as if the cash will all be profitably deployed, without leverage, and we’ll pay 26X EBITDA for that cash flow.

Presumably they’ll bring on more debt or lease properties or otherwise raise more capital to lever that up a little bit more, and certainly their revenue projections require them to build more facilities than they can currently pay for without debt. So there’s some intrinsic logic to the business model, and it’s a reassuringly real-world business compared to a lot of tech startups, even if it’s a bit on the expensive side… it’s really about deciding how much you want to pay for early leadership as a public company in this space, their impressive management team and their plans, and whatever brand value they can build through the appeal of their produce, like that first crop of branded tomaties, and their “B Corp” bona fides. I’m on the fence at this valuation, even though I’ve been able to reasonably justify a 30-40X EBITDA valuation for my favorite indoor agriculture facility owner (that’s the pot landlord IIPR), but it’s true that controlled environment agriculture is a growing trend, tomatoes face a lot less regulatory risk than marijuana, and AppHarvest is an impressive startup.

There are quite a few “pure play” public companies connected to indoor agriculture, including hydroponics and tech suppliers and service companies like Agrify (AGFY), Hydrofarm (HYFM) and Urban-gro (UGRO), or retailer GrowGeneration (GRWG), in case you’re interested, but the only other big greenhouse vegetable company I’ve looked at in any detail was Village Farms (VFF) up in Canada (they’re also in Texas and Mexico) — which, in valuation terms, might be a little bit of a cautionary tale for AppHarvest.

Village Farms has been growing nicely, and is also in the cannabis business with their Pure SunFarms operation and some CBD plans, but they’ve been around for decades, have expertise and branded tomatoes and other vegetables in lots of large chains like AppHarvest is planning, and their core produce business generated about $157 million in revenue in 2020 and just about broke even on an EBITDA basis…. But even with 40% revenue growth last year and expectations for similar top-line growth this year, and a profitable marijuana business on the side, that stock is valued at only about 4X trailing sales. Perhaps AppHarvest has better facilities or will be more efficient than Village Farms, and it’s definitely planning more aggressive expansion… but Village Farms is also more diversified and has been doing this for longer, and their tomatoes will probably cost about the same as AppHarvest’s in the store. Reason for a little patience or caution, perhaps.

That’s just what I’m thinking, though, and why I’m keeping my wallet in my pocket so far — with your money, it’s your call that matters. See great things for AppHarvest? Think they’ll revolutionize our food supply over the next decade and earn that premium valuation? Let us know with a comment below.