We recently compiled a list of the 7 Best Vertical Farming and Hydroponic Stocks to Buy. In this article, we are going to take a look at where Hydrofarm Holdings Group, Inc. (NASDAQ:HYFM) stands against the other vertical farming and hydroponic stocks.
The agriculture sector has always been crucial to both the global economy and everyday life. However, to meet rising food demands, harmful farming practices have been widely adopted, contributing to climate change, deforestation, and soil degradation. As a result, sustainable and eco-friendly farming innovations have become essential. Vertical and hydroponic farming are two such innovations, offering environmentally friendly and efficient methods for producing crops in a way that reduces the strain on the planet.
Sector Performance
The broader market had a strong performance in 2024, largely driven by technology stocks in the first half, resulting in a roughly 18.0% year-to-date (YTD) increase. However, future performance remains uncertain due to ongoing market volatility.
In 2022, inflationary pressures in the U.S. reached a peak, fueled by rising input costs for energy, transportation, and labor. Since then, inflation has gradually decreased, providing relief for businesses across sectors. Inflation continues to ease as the annual inflation rate slowed for a fifth consecutive month to 2.5% in August 2024, the lowest since February 2021. This has led to lower costs associated with these essential elements of vertical farming, improving margins. Additionally, lower energy costs due to reduced inflation can make hydroponic and vertical farming more financially sustainable, as these farms rely heavily on controlled environments.
Overall, food and farming companies are still grappling with the lingering effects of inflation, particularly elevated commodity prices, as the farm products sector has underperformed with a 7.0% YTD decline.
That said, the shift toward more “value-driven” consumer spending could boost demand for vertical farming produce. As consumers look for affordable, fresh, and local food sources, vertical farms can offer year-round, sustainably grown produce with minimal transportation costs, making it a competitive option in a price-sensitive market.
Vertical Farming & Hydroponic Market
Vertical farming involves growing crops on vertical surfaces instead of traditional horizontal fields. By using vertically stacked layers, farmers can produce more food in the same or even less space. Often, vertical farms are incorporated into structures like greenhouses or skyscrapers. Hydroponics, a soil-free method of growing plants using water and nutrients, is a highly efficient approach that uses less space and water than traditional farming. According to Markets and Markets, the global vertical farming market is projected to grow from $5.1 billion in 2023 to $15.3 billion by 2028, with a CAGR of 24.7%.
A new study from the U.S. Department of Agriculture (USDA) and Virginia Tech suggests that technologies like controlled environment agriculture and agrivoltaics may play a key role in the future of farming. Researchers highlight that these innovative approaches could boost yields, improve nutrition, enhance access to local foods, and provide better year-round availability of fresh produce compared to traditional large-scale outdoor farming.
Between 2009 and 2019, the number of controlled environment agriculture operations in the U.S. more than doubled to nearly 3,000, with crop production increasing by 56%, rising from 502 million pounds to 786 million pounds. By 2019, over 60% of tomatoes, cucumbers, and lettuce in controlled environments were grown using hydroponics.
As of 2021, most of the approximately 300 agrivoltaics sites were solar farms with pollinator-friendly vegetation. Around 35 of these sites combined solar panels with vegetation grazed by sheep, while few included specialty crops like blueberries.
Challenges in Vertical Farming
Vertical farming faces challenges like high energy costs and labor expenses, leading to the failure of many ventures. However, advancements in technology have begun to address these issues, making vertical farms more viable. A prime example is Bowery Farming, founded in 2015 by Irving Fain in New York. Bowery produces a variety of fruits and vegetables in smart indoor farms located within 200 miles of major cities, using technology to automate and optimize the entire value chain.
As such, we have compiled a list of some of the best vertical farming and hydroponic stocks to buy today since they may well skyrocket sometime in the near future.
Methodology
For this list, we scanned Insider Monkey’s Q2 2024 database and selected companies involved in the Vertical Farming and Hydroponic industry, focusing on areas relevant to sustainable agriculture and innovative farming technologies. We picked seven companies with strong balance sheets and solid financials and ranked them in ascending order of hedge funds having stakes in them. For stocks with the equal number of hedge fund holders, we used their upside as the tiebreaker.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A large field of sunflowers under bright agricultural lighting.
Hydrofarm Holdings Group, Inc. (NASDAQ:HYFM)
Number of Hedge Fund Holders: 5
Hydrofarm Holdings Group, Inc. (NASDAQ:HYFM) is a leading manufacturer and distributor of hydroponics equipment and supplies for controlled environment agriculture. Their products include climate control solutions, growing media, and nutrients, along with a wide range of proprietary branded items. For over 40 years, Hydrofarm has supported growers by making cultivation easier and more efficient.
In Q2 2024, Hydrofarm Holdings Group, Inc. (NASDAQ:HYFM) net sales declined by 13.1% to $54.8 million compared to the same quarter last year. This decrease was primarily due to a 10.3% reduction in product volume and mix, driven by oversupply in the cannabis industry. Gross profit also took a hit, dropping to $10.9 million, compared to $14.5 million in the prior year.
While the company’s net loss widened to $23.5 million from $12.9 million, largely due to a non-cash loss from the sale of its IGE assets, Hydrofarm Holdings Group, Inc. (NASDAQ:HYFM) improved its adjusted EBITDA, delivering a modest $1.7 million in the quarter. The company’s restructuring efforts resulted in a 20% reduction in SG&A expenses, underscoring its operational discipline.
Furthermore, Hydrofarm Holdings Group, Inc. (NASDAQ:HYFM) maintains strong liquidity with $30.3 million in cash and $20 million in borrowing capacity. The company held a zero balance on its credit facility and generated $3.8 million in operating cash flow during the quarter. Although free cash flow dipped slightly to $3.4 million due to inventory investments, the company’s effective cash management and cost-saving efforts position it well for future opportunities.
In the past month, Hydrofarm saw a stock upsurge of nearly 29%, driven by its restructuring efforts and cost-saving initiatives that helped alleviate margin pressure. However, the company experienced a 20% decline YTD, primarily due to oversupply in the cannabis sector, pricing pressures, and softer demand for hydroponics products amid economic uncertainty.
While analysts currently project a downward trend, the company is expected to benefit from the growing U.S. adult-use cannabis market, which represents 56% of global sales. Additionally, five hedge funds, with a combined $1.1 million investment, remained bullish on Hydrofarm’s potential for future growth, according to Insider Monkey’s Q2 2024 database, earning it a spot on our list of the best vertical farming and hydroponic stocks to buy.
Overall HYFM ranks 4th on our list of the best vertical farming and hydroponic stocks to buy. While we acknowledge the potential of HYFM as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than HYFM but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.