Agrify’s Billion Dollar Truth
The Absurdity of the Stock’s Valuation Tells Us Something Important
Speculative juices are flowing aplenty in the market these days. One such example is Agrify (NASDAQ: AGFY).
This discarded almost insolvent cannabis equipment producer had a $5 million market cap just one short month ago. Three weeks later, Agrify’s market cap exceeded $1 billion. Despite a big retracement, the stock is still up close to 1000% in just one month. While Agrify may be yet another example of speculation gone wild in a bull market, I think Agrify shines a light on an important kernel of truth.
And that truth is the sheer excitement and upside in hemp beverages.
What changed in the last month for Agrify was that Green Thumb (OTC: GTBIF) and its CEO Ben Kovler effectively took over Agrify, pumped capital into the company and then announced the acquisition of a hemp beverage cannabis brand called Seniorita.
The cannabis industry is in a brutal depression with the main index down almost 40% this year and 83% in the past five years. So, what got investors so excited about Agrify?
It’s that THC derived from hemp and THC hemp derived beverages are Federally legal thanks to the 2018 Farm bill. States started to regulate and allow the sales of these beverages just like alcohol. And the market is absolutely exploding higher. Ground zero is Minnesota where I believe THC beverages are approximately 15% of all liquor store sales.
Alcohol sales in the US are over $260 billion. If hemp beverages capture 10-20% of that market share, just like they have in Minnesota, cannabis beverages could be a $26 to $52 billion revenue market.
I’ve not only written about my excitement about hemp beverages, but I also launched and closed a venture fund dedicated to hemp beverages. Here are some of the posts I have talked about hemp beverages:
Apparently, Green Thumb and Ben Kovler are now drinking from the same cannabis Kool-Aid I am and see the enormous potential.
But this is where the problems start for Agrify, because right now the whole company’s valuation is built on nothing but air. It’s a story with potential, but no real sales, earnings or fundamentals. As far as I can ascertain, the company it is buying (Seniorita) has de minimis revenues.
It reminds me of that hilarious scene in the show Silicon Valley, where the venture capitalist Russ Hanneman tells a startup’s CEO not to generate revenue. Why? Because it gets in the way of valuation.
Further complicating the Agrify story is its incredibly small float, or freely tradeable shares. The company has around 16 million fully diluted shares, but I calculate that less than 1 million of those shares are freely tradeable. Like any great IPO with no float, Agrify can and has soared. At one point it jumped to as high as $84 per share (which would give it an insane $1.3 billion valuation). But it has also crashed, plummeting 38% in one day on just 200k shares traded. For now, it’s a meme stock with no fundamentals, what do you expect?
The challenge for Ben Kovler and Agrify is to justify its still absurd valuation. Do they really want to consolidate and buy hemp beverage brands? If so, how do they buy them? They could pay some cash for sure, but they probably want to use equity as well. So how do you get brands to want overvalued equity? Therein lies the rub. Or do they use their own cash to build it out from scratch? That may take quite a bit of cash, which means more equity issuance (They have already done an equity offering at $22.30 per share since the runup started).
My fear is Agrify might either build slowly and possibly miss their window to be a first mover, or they may not acquire the right companies. They may in fact face adverse selection. That means they will be able to buy companies like Seniorita, a brand with no material revenue to date or brands that are in significant distress and will accept anything to survive. But they miss out on buying actual thriving brands that are currently crushing it right now. Why would they miss out? Because the companies who are thriving may not want a wildly over-priced equity currency based on a limited share float.
And this along with the still absurd valuation is why I own zero shares in Agrify right now. Any real institution will want to see real meat on the bones before buying any shares. Anyone peering under the covers will realize that the minute the float increases, the stock price will soon face significant pressure.
Agrify has exposed the important truth about just how excited investors can get for a big growth story in cannabis. Now, the question is can they build and assemble a real company with real brands? How long can they maintain the extremely low float? How will they balance their stock equity as currency versus the need to grow now?
Kudos to Ben, Green Thumb and Agrify for moving this quickly. But they should know that the clock is ticking. It is my belief when the Farm Bill’s ink dries and there is still a pathway for hemp beverages, that the barbarians at the gates will come storming in and they will be looking for dance partners (read: acquisitions and investments), and any first mover advantage or benefit from being one of the few capital sources for hemp beverages will disappear.
Maybe the better analogy is one of penguins in this picture.
All the penguins are waiting and watching to see what happens to the first penguin that jumps in. Will that penguin be eaten by something scary or is the fishing great down there? Ben and Agrify have just jumped in. All the other “penguins” are watching. It shouldn’t be long now and 2025 is lining up to be a spectacular year for hemp beverages and lots of penguins jumping in to join Agrify.
P.S. This is not the first time I have written about Agrify. Much to my embarrassment I profiled the CEO and the company three years ago. I said it was a company to “watch.” Turns out the company was not what it seemed. One example was that the company was booking revenue from building a school and acting like it was earning that revenue from cannabis. As always, this is a good reminder to always do your own due diligence and remember that all of us get things wrong from time to time, including me.