Hydrofarm Stock: Indoor Agricultural Play Down 96%; Time to Consider It?

Hydrofarm Stock: Indoor Agricultural Play Down 96%; Time to Consider It?

Hydrofarm Holdings Group Inc in Potential $172-Billion Market

The world’s population recently reached eight billion, which means there are many mouths to feed. The problem is that the amount of good-quality agricultural land is limited, but that presents opportunities for indoor and vertical farming businesses.

The process of indoor farming is referred to as “controlled environment agriculture” (CEA). Vegetable producers use the CEA method, and it’s also used by marijuana growers.

The global CEA market could expand from $74.5 billion in 2022 to $172.2 billion in 2027, representing a compound annual growth rate (CAGR) of 18.7%. (Source: “Controlled Environment Agriculture Market,” KD Market Insights, last accessed January 4, 2023.)

While there are numerous CEA players, on the smaller end, I like Hydrofarm Holdings Group Inc (NASDAQ:HYFM).

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The company manufactures hydroponic equipment and supplies that are used by the CEA sector. We’re talking about high-intensity lights, climate control solutions, grow media, nutrients, and more. (Source: “Corporate Profile,” Hydrofarm Holdings Group Inc, last accessed January 4, 2023.)

Hydrofarm was valued at a whopping $2.5 billion in February 2021. The company currently has a market valuation of just over $100.0 million. Therefore, the value of HYFM stock has plummeted by 96%, which opens up an opportunity.

Chart courtesy of StockCharts.com

Revenue & Debt Concerns Put Pressure on HYFM Stock

Hydrofarm Holdings Group Inc delivered three consecutive years of double-digit-percentage revenue growth. Its revenues surged by 126% from $211.8 million in 2018 to $479.4 million in 2021, representing a CAGR of 31.2%.

But there are some concerns. Analysts estimate that the company’s revenues fell by 30.9% to $331.4 million in 2022 and that its revenues will fall further to $302.6 million in 2023. (Source: “Hydrofarm Holdings Group, Inc. (HYFM),” Yahoo! Finance, last accessed January 4, 2023.)

While that is a concern, Hydrofarm Holdings Group Inc trades at an attractive 0.3 times its consensus 2023 revenue estimate. My view is that Hydrofarm stock’s significant price deterioration has more than accounted for the company’s expected revenue decline.

Hydrofarm Holdings Group Inc will need to rein in its expenses as its revenues drop and its debt load remains high.

Fiscal YearRevenues (Millions)Growth
2018$211.8N/A
2019$235.111.0%
2020$342.245.6%
2021$479.440.1%

(Source: “Hydrofarm Holdings Group Inc.” MarketWatch, last accessed January 4, 2023.)

In 2020 and 2021, Hydrofarm produced positive earnings before interest, taxes, depreciation, and amortization (EBITDA).

Fiscal YearEBITDA (Millions)Growth
2018-$9.9N/A
2019-$6.138.9%
2020$15.4354.2%
2021$37.9146.2%

(Source: Ibid.)

Hydrofarm Holdings Group Inc also managed to achieve positive generally accepted accounting principles (GAAP) diluted earnings per share (EPS) in its last two reported years.

However, after earning $0.59 per diluted share in 2021, the company is expected to report an adjusted loss of $1.46 per diluted share for 2022. The consensus analysis has Hydrofarm Holdings Group Inc losing an adjusted $0.74 per diluted share in 2023. (Source: Yahoo! Finance, op. cit.)

Fiscal YearGAAP Diluted EPSGrowth
2018-$0.47N/A
2019-$1.21-157.4%
2020$0.2975.7%
2021$0.31205.9%

(Source: MarketWatch, op. cit.)

Another risk for Hydrofarm is its net debt, which was $155.0 million as of the end of September 2022. Making the interest payments aren’t an issue at this time, but returning to profitability and cutting debt will be critical for the company.

Analyst Take

Despite Hydrofarm stock’s decline, institutional investors haven’t given up on it. Shares of Hydrofarm Holdings Group Inc have decent institutional ownership, with 167 institutions holding a 49.3% stake. (Source: Yahoo! Finance, op. cit.)

Moreover, company insiders have been net buyers of HYFM stock. Over the last six months, insiders added 135,000 shares.

Hydrofarm is a work in progress that needs to address its revenue and earnings decline and move back to profitability. Hydrofarm stock’s significant price drop is due to the company’s weak financial estimates, but in my view, the drop is overdone.

The bullish tailwinds in the CEA market should benefit Hydrofarm Holdings Group Inc (and its shareholders).