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In this podcast, Motley Fool senior analyst Jason Moser discusses:
Motley Fool contributor Rachel Warren talks with AppHarvest (APPH 2.84%) CEO Jonathan Webb about why he founded his company, the future of farming, and trends investors should be watching.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on May 9, 2022.
Chris Hill: [MUSIC] Today on Motley Fool Money, a conversation about the future of agriculture and a sign that more companies are cutting back on spending. I'm Chris Hill, I am joined by Motley Fool Senior Analyst, Jason Moser. Thanks for being here.
Jason Moser: Hey.
Chris Hill: Wouldn't it be nice if we woke up and the stock market just was bouncing up magically?
Jason Moser: [laughs] What is this you speak of? [laughs]
Chris Hill: But that's not the case. We're in a rough patch. For anyone who wasn't paying attention previously, we are in a rough patch. The new wrinkle is that it's clear now we're getting a growing body of evidence that the people running public companies are keenly aware of where we are in the market, and the latest example is with Uber because CEO, Dara Khosrowshahi, sent an email to employees saying Uber is going to cut their spending on marketing, they're going to treat hiring as a privilege and I will just quote from early, and this is posted online for anyone who wants to read it. But early in this email he writes, "After our earnings report, I spent several days meeting investors in New York and Boston. It's clear that the market is experiencing a seismic shift and we need to react accordingly." We can go in any number of directions, Jason. But the striking thing to me is the use of the phrase, seismic shift. It's one thing for us as investors to say, boy, we're in a bad stretch here, and it's another thing for the CEO of a public company to say, we are as of this moment, rethinking pretty much everything we're doing. Everything is on the table.
Jason Moser: It makes a lot of sense. I do appreciate the fact that they are going to pull back on unnecessary marketing spend. To me, Uber has hit verb status. I think that it's in that pantheon of companies that they don't really need to market a whole heck of a lot, because a lot of people really already know what it is and what it does. Whether it's Uber, Uber Eats, the more obscure freight side of the business. Ultimately, this is a business about mobility and getting things or people from point A to point B. I'd imagine most people out there know Uber at this point. It is interesting commentary I think, the seismic shift he mentioned given the meeting and who it was with, you wonder if the consensus of the investing community is pivoting away from these adjusted metrics and these companies where we always talk about the path to profitability as opposed to actual profitability. You can only tell that story for so long, and that story really gained a lot of steam during a time.
We've talked about this before, but those stories really gained a lot of steam during far different economic conditions. We're now seeing a whole different approach here as now we start to see interest rates tightened, the money supply tightened. There's more and more talk of recession and whatnot. So it does feel like maybe in the investing community writ large is a little bit more focused now. We've been talking about this path to profitability for a long time. We either want to see profitability or I really want to be able to see that path. With a company like Uber, really that path should be pretty clear the business itself, and I have to admit this business is growing increasingly attractive to me as this valuation starts to come down, but the most recent quarter when you look at the numbers, this is a business that's really growing. Gross bookings up 35 percent.
The problem is, and you see that headline net loss of $5.9 billion. That's $5.6 billion of that is just a headwind related to their equity investments in companies like the Grab and Aurora and the DiDi stakes and so you're turning maybe more toward cash flow. That shouldn't be a surprise. I think for the most part, the investing community has always appreciated cash flow. I think it's been lost in all of the hype recently, and it's a little bit cleaner, it's a little bit less cluttered granted we all make adjustments to cash flow as well. There will be ongoing debates I'm sure as to whether stock-based compensation should be adjusted out or not. But that's for another show. I think that ultimately though it's an astute observation from him in that the investing community is demanding more now, it is a tricky time to be an investor, but when you have a business like Uber that really dominates its space, there's really no excuse for a business like this not to shine.
Chris Hill: You always say you're much more interested in companies meeting their own expectations from rather than Wall Street's expectations, and earlier this year at Uber's Investor Day, he said they're going to be cash flow positive by the end of the year. Now it looks like he is going to be pulling every lever possible to make sure that happens. In terms of the broader landscape, just last week, we saw the reports from Meta platforms, they've ordered a freeze on hiring, and I can't imagine we're not going to see more of this from large public companies.
Jason Moser: I think it is an absolute given we will see more of this. I think there's only one direction really we can go, and that is in that direction. Meta was not the only one. Robinhood talking about not only freezing, but letting some of their workforce go. Clearly, if Musk's Twitter deal goes through, and it looks like it will, that is going to be a business where the cost structure gets right-sized very quickly, and those are just large publicly traded companies. Let's not forget about all of the small, the medium-sized businesses out there that have really been enjoying these easy financial conditions for a long time. I said it a few times. It feels like we are going to see the shoe on the other foot here at some point these days where we have more jobs than people to fill them, that's not going to last forever. All of this stuff comes back full circle.
As more and more businesses start to not only freeze their hiring, but also start to work on rightsizing their cost structures, which usually means letting a healthy amount of people go, that shoe I think is going to be on the other foot here sooner rather than later. If we enter into a recession, when I should say we enter into a recession because it is a matter of when not if, I don't know when it's going to happen, but it will eventually, that's just going to be one more thing for people to really be concerned with. Consumers are already feeling the pinch of record-high inflation. If you add to that unemployment situation where now all of the stimulus has really ultimately disappeared. We saw personal savings rates just a couple of years ago upwards of 30 percent plus, and now we're back down to six percent and lower, those savings are gone. If I am a consumer, I am not counting on the government stepping back in to say, let's just pump a little bit more stimulus into the system to try to encourage the soft landing. Soft landing or not, we got to land [laughs] and this is the path to that, and I have a feeling it's going to be a bumpy ride.
Chris Hill: You know who's not cutting back on their marketing spend? Movie studios. They are gearing up for a big summer and every studio with a tentpole movie has got to be encouraged by what happened this weekend for Disney. Doctor Strange and the Multiverse of Madness took in $185 million in its opening weekend here in the US, 450 million worldwide. On a day when pretty much everything across the board and the market is getting whacked. If it was not that type of a day, I wouldn't be surprised to see shares of Disney ticking up a little bit on this, but this is, I don't know, I thought this would do well at the Box Office. I didn't think it would do this well.
Jason Moser: Yes. The Marvel Universe is really strong. That is content that gets a lot of people out there and part of that I'm sure is just some pent-up demand. If you look at the actual numbers, you go back three-years ago, Domestic Box Office receipts totaled $11.4 billion, and if you then go to 2020 and 2021 combined, the combined ticket sales of those two years were just a little bit more than half of that to put all of this in the context. We can argue whether this is a market that is in a slow secular decline. I would argue it's probably not in a slow secular decline, I just don't think it's the most robustly growing market in the world.
Theaters still are going to serve a purpose and they will have a place. Maybe it'll be a smaller place, who knows? I think there's going to be a lot of interesting negotiations are going forward regarding the theatrical window in exclusivity and how that all plays into the streaming environment. But I think there's a lot of interesting data out there in regard to how consumers are feeling these days. Not only in regards to just the economy and getting back out, traveling, things like that but our movies in general and I'd found some neat data from Morning Consult earlier this morning and you look at this and it's more than three or five Americans, about 62 percent of Americans right now are comfortable heading to a movie theater and that certainly is significantly higher than it was just a couple of years ago. It's up 18 percentage points since the beginning of this year.
Now, the majority of that, Millennials 70 percent, Gen Zers 80 percent, they're the generations most comfortable heading back to the theaters, and baby boomers at 52 percent remain the least comfortable. That all makes sense, I think for the most part. Kind of the way we've seen these last couple of years play out. I think that we're certainly seeing customers, consumers are more than ready to get back out there and start doing stuff. I think what it really boils down to, and we stayed a lot, content is king. I don't think this is something that just spans far wide. You could just put any movie out there and it's going to do well. I think it depends on the movie, but that really should play well on the Disney's hand because Disney owning Marvel, of course, along with Lucasfilm and Pixar, they possess a lot of IP and they have a really strong pipeline of films that are set to come out through over the next several years. If it really does boil down to that combination of consumers being ready to go back yet, but only for the right movie, well, I feel like that probably bodes pretty well for a company like Disney.
Chris Hill: It does, certainly later this year they've got another Thor movie, Pixar's Lightyear is coming out. But you've also got Paramount with the Tough Gun sequel, you've got Comcast Universal with another Minions movie, Sony with Bullet Train. It does seem like there are opportunities that again, I think all of these studios are going to be taking their shot and spending accordingly.
Jason Moser: Yeah, it feels that way and it wouldn't surprise me to potentially see a little bit more consolidation in companies trying to get stronger catalogs of intellectual property. Because the points you made, they're all very good, but it also lends itself to that lumpy nature that we see often times with these entertainment companies. Disney over time has been able to smooth that lumpiness out a little bit, not just because of the diversity of their business model. They make money beyond just a movie theater, but it's also just bringing all of that intellectual property under their umbrella with those three acquisitions alone, Pixar, Lucasfilm and Marvel were just just phenomenon.
That helps them keep a little bit more of a reliable pipeline. Into that point, it's interesting to note that what's preventing a lot of people, what keeps a lot of people from going back to theaters these days, it's not really COVID. It's not the conditions on the ground. It's the costs involved with going to the movies, the tickets and the concessions, and the interest in the film itself. It really does boil down to making sure you have the right films in the right places. Then certainly, I think the theaters are really going to be chomping at the bit to do all they can on the concession side because, hey, if you're going to the movie theater, and I don't go all that often but I do enjoy it when I go, there is no way I'm sitting down for that movie without a big old bucket of popcorn [laughs] in a massive diet coke and, Chris, they can probably charging 100 bucks and I would probably still pay it because I go so infrequently. But it is worth remembering those theaters makes a ton of profit off those concessions.
Chris Hill: Jason Moser, great talking to you. Thanks for being here.
Jason Moser: Yes sir. [MUSIC]
Chris Hill: Like a lot of entrepreneurs, Jonathan Webb saw a problem in the world and wanted to see if he could help solve it. The problem, increasing the supply of food that we grow. The company he started to tackle that challenge is AppHarvest. Motley Fool contributor Rachel Warren recently caught up with Webb to talk about how he started AppHarvest, the trends investors should be watching and a lot more.
Rachel Warren: First off, for members of our audience who are brand new to this space, what do you define as AgTech? Next, could you dive a bit into your company's business model, what it does and it's overarching mission?
Jonathan Webb: Yeah, so AgTech, as you see it today, is just how do we use modern technology to advance agriculture. But really agriculture in and of itself is a human constructs for humans. We've over many centuries do use technology in different forms in order to grow food. The last great technological revolution in American farming is really when the tractor was introduced. We've seen a lot of iterations since then, but we haven't seen anything as drastic as the tractor. Today it's using big data, AI, vision syncing software, and controlling the climate, and we've tried to say that Controlled Environment Agriculture, CEA, is really the third wave of sustainable Infrastructure. If you look 20 years ago, it was renewable energy, 10 years ago it was electric vehicles, and today it's really the third wave is Controlled Environment, Agriculture and we have to figure out how to grow a lot more food with a lot less resources and do it in the middle of climate disruption. Using innovative business model, using the tools that are available today around the world and building those into a system is really at the heart of what AgTech and CEA is and we at AppHarvest, there are one model out there that's attacking in one unique way. But there's many different models and they will have to emerge as we build a more resilient and robust foods system that's going to feed our world, not just today, but 30 years from now.
Rachel Warren: Yeah. Absolutely. Absolutely. I wonder if you could also walk me a bit through the journey to founding AppHarvest. What's the story there? Your choice to locate the business in Appalachia as mentioned that it's home to you and why the AgTech space in particular.
Jonathan Webb: Yeah. For me and I think any innovative company it should always be about starting with the problem and then trying to build a business model or solution around that problem. You had mentioned previously in the intro, my background before this was building large-scale renewable energy projects. I was a part of building some of the largest solar projects on military installations and I've transitioned from that, which is large-scale energy development and renewable energy over to controlled environment agriculture. It really started with the problem and zooming out and looking at the UN says, we need to grow 50-70 percent more food by 2050 in order to grow that 50-70 percent more food some have said we would need two planet Earths to have enough land and water. Where to use 70 percent of freshwater today is used for agriculture purposes. How do you make that leap when we've already expanded so much around the world and the sheer land footprint and the water needed to grow that food.
The numbers don't add up and our climate discussions are very myopic. We talk about carbon all day, every day and the world thinks well, if we solve for carbon, we will prevent a rising temperature and all will be good. That's simply not the case and we have to expand these environment discussions to embody everything needed in order to really support future human civilizations. We're not talking about a 100 years away. There's a great documentary that just came out Eating Our Way to Extinction. You're looking at 20, 30, 40 years out with climate disruption hitting and with the need for food rising. How are we going to grow this stuff? The good thing is, there's technologies that are available that we can use today and marrying that together with new technologies like robotics, AI, vision sensing you can grow food with 90 percent less water, get 30 times yield per acre, and do it year-round in a climate resilient structure.
Our business model at AppHarvest is really to build some of the world's largest controlled environment agriculture facilities. We're located in the heart of Central Appalachia and if you zoom out of Morehead, Kentucky, you'll see that we can get to about 70 percent of the US in a one-day drive. We can get up to New York, down to Miami, over to St. Louis, to Washington, DC and we're shipping to the top-25 grocers right now. Walmart, Kroger, Publix, Costco, our tomatoes are on Wendy's Burgers and by the end of the year we'll be growing strawberries, leafy greens, all different types of tomatoes and we're doing it in a place that's water rich. If you look at California and you look at the Southwest of the US they're drying up. We import two-thirds of our fruits and vegetables today into the US. Then the fruits and vegetables we do grow are being grown in drought stricken regions that are running out of water. We at AppHarvest, it's about trying to build a company, build a solution around the problem. We want to be a helpful player on the international stage. But right now we're very focused on building out that food system here in the US.
Rachel Warren: Absolutely and it's very exciting to hear about. One of the things I think is why when I dive into a little bit, talking a bit about AgTech, what that looks like. As consumers, it's clear to see the benefit there, but as investors, why should this matter to investors? Why is this something a thematic trend to be focusing on at this point in time? What's the potential environmental impact here to consider as well?
Jonathan Webb: Yeah. This is a long-term play for us. We elected to take the company public because we thought building this company allows us to have a voice with regulators, with consumers, with grocers, and allows us to build that transparency that's needed in order to be a global food company. But it's hard. We are trying to manage a business where we are thinking in decades, 10, 20, 30 years out, while also being head down knowing that we have to deliver every quarter for our public investors. But for us, this is a super long-term play where the trends and no matter which way you look, the tailwinds are all on our back. You've got climate disruption, which is making it incredibly difficult for a farmer to predict yield and grow outdoors, whether it's flooding one-year or drought several years after.
You've got increasing regulatory focus on our food system, which you look at the USDA earlier this year, they blocked imports of avocados from Mexico into the US. We're importing food into the US from farms that we have no visibility into. That are paying people five dollars a day. In some cases, forced labor. In some cases, illegal chemicals being used throughout the year that if you use those chemicals in the US you would go to jail. Our food system is broken, it has to transform. If you look at many of the large food companies today, they're like the fossil fuel companies in the '90s and they're like the cigarette companies in the '80s. It eventually will evolve and food has got to be a part of the health discussion.
When we talk about sustainability and when we talk about building a sustainable food company, it should be good for people, so healthy for you, it should be good for planet. We have the technologies that are available to grow food and produce food that's good for you as a consumer, but it's also good for our planet and allows us to have a much lighter footprint on planet Earth as we grow humanity in the years to come. Why would an investor look at controlled environment agriculture?
Again, our viewpoint is we are in the first inning of controlled environment agriculture, but it's really like the third wave of sustainable infrastructure. Getting in CEA today would be like getting in renewable energy 20 years ago, or electric vehicles 10 years ago. It is absolutely going to happen. The question is how big, how fast? But eventually, on planet Earth, they'll be a time when you eat a fruit and vegetable grown outdoors and that's a luxury. Whether it's again, drought, acid rain, a variety of climate disruption, eating food grown outdoors, eventually, whether it's 50 years from now, 30 years from now or a 100 years from now. That will be a luxury. We believe growing fruits and vegetables indoors at scale in a controlled environment is simply going to be the predominant way in which we grow fruits and vegetables in the decades to come.
Rachel Warren: One last question for you. As investors what are a couple of key trends we can be focusing on to track the growth in overall health of the AgTech space. What should we be looking for?
Jonathan Webb: I think, big picture it's going to be market share. It's replacing what I would consider dirty open field products that are imported from other countries. Look at tomatoes last year, four billion pounds of tomatoes were imported from Mexico into the US. That's just one product. You have a whole suite of fruit and vegetables, so it's about market share at scale. Getting CEA products on shelves for consumers at scale and then a trend to watch just outside of just specific to AgTech is water. It's terrifying. Water is life. Water is the reason me and you are on planet Earth.
Our planet has the one thing in the known universe that no other large scale planet has, which is water. Without water, me and you have a week to live and plants have a couple of days to live. The way we use that water is critically important. If you look at what's going on in the US and around the world right now it is terrifying. You look at the drought problems in the Southwest with again, Lake Mead and the Colorado River. You look at the drought problems in California. We have to do something different. I would say the two most important things are market share for CEA products and displacing current imports. But it's also tracking the water issues that are continuing to increase around the world and in the US. Those two things as water issues rise, you're going to see a bigger demand for products like we grow, where we use tremendously less water. Ultimately, it's going to be about consumers, grocers and regulators. They want to work with us to redefine what American agriculture looks like. [MUSIC]
Chris Hill: To learn more about what Jonathan Webb and his team are trying to do, just go to appharvest.com. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill, thanks for listening. We'll see you tomorrow.
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