Investing In AeroGrow’s Gourmet Herb Gardens
The Economist.com had a very interesting article on a company called AeroGrow that makes Kitchen Crop Appliances, based on a technology invented by NASA called aeroponics. In aeroponics, plants grow at an accelerated speed because nutrients are sprinkled directly onto their roots, which dangle in the air instead of being planted in soil.
According to the Economist, these systems have been widely used by commercial pot growers but this is the first time it is being adapted from home use to grow tomatoes, lettuce and herbs.
I checked out AeroGrow’s Herb Garden on Amazon. For around $150 you get a really neat little garden. The picture doesn’t actually do it justice. Check out the AeroGarden Video. The kit allows you to grow herbs superfast all year round. Quite a phenomenal product!
on Amazon. For around $150 you get a really neat little garden. The picture doesn’t actually do it justice. Check out the The Economist article mentions that the company has spent 4 years developing this product. It’s almost idiot-proof and they claim a 99.9% success rate for the herbs, which is pretty spectacular considering I’ve killed mint, which is a pretty hardy weed and tough to get rid of. There are also sites that have “sprung up” detailing how to modify to for a different type of weed too. While the company doesn’t endorse that usage, they do have a pretty nice range of salads, herbs and even roses.
The first thing that came to mind was whether I could make any money of this idea. The stock price of AeroGrow [AERO] has plummeted from around $9 in October 2007 to about $3.30 today. That’s a pretty steep 65% drop in less than 6 months. However at this price the company is trading for just over 1 times sales, which seems pretty low for a small cap growth company, and a forward PE of 15. It also looks like the insiders are nibbling at the shares too. The CEO, Bissonette, thinks aeroponics will become a $1.5 Billion industry. So far in the last quarter of 2007, AeroGrow had $14 million in sales ( a 300% increase from the year before) and is close to profitability. Definitely seems worth looking into.
Maybe it’s time to invest in this stock? Or instead I should put my money where my mouth is and buy an actual AeroGarden Kit! What would you guys choose?
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March 13th, 2008 at 9:59 pm
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March 13th, 2008 at 10:12 pm
Very interesting, thanks for the info, Nirav.
I’d buy the product first. Many products look/sound very good, but once you start to use them for some reason you don’t enjoy them as much. If you get the product and start raving about it to your friends - then I’d pick up some shares, I’m thinking of getting the product myself now that I’m thinking about it.
March 14th, 2008 at 10:28 pm
If you do buy it, don’t forget to use my referral link
March 17th, 2008 at 7:53 am
This was on CNBC several weeks ago.
http://www.youtube.com/watch?v=x54brLGrQIM
The growth rates are quite astonishing, but I just don’t know how well a stock like this will do with household incomes being stretched to the limits at present. Plus, the unit is rather pricey and must have a massive markup if it’s being sold through TV shopping networks.
Although, if you have bought fresh herbs from a grocery store lately, paying $5 - $10 for a few oregano leaves is crazy. Note - real oregano, not the “other oregano”.
March 18th, 2008 at 1:29 am
Nirav,
I took a look at the 10-k and most recent 10-q. The company appears to be improving margins and possibly heading toward an operating profit as early as the 4th Quarter of this year.
Residual sales of seed kits are growing as a source of revenue, suggesting that there are quite a few people who are continuing to use the unit. I want to believe that they are building a “razor and blade” like business, but I suspect that many people will buy these kits to grow an herb not available from the company - ahem.
The red flags though are the following -
1. Lots of “phantom” equity - 1.8 mio options outstanding, 6.5 mio warrants outstanding and the high probability that additional equity will be floated to provide working capital
2. Huge growth in working capital. This is a rapidly growing business, so some growth in inventory and receivables is to be expected, problem is, this business is nowhere near cash-flow positive. Will likely turn a profit within next 12-18 months but have neg operating CF
3. Management are a bunch of serial “startup” guys whose businesses have a pattern of reverse-merger activity. That is, they create alot of “development stage” businesses and take them public, then effect reverse mergers to take other startups public without a big registration effort. So far, none of the CEOs earlier businesses remains a going concern.
This may be the biggest business he has ever run.
My bottom line - its a big risk. Stock has already declined to $3 since the original post. Undercapitalized small growth companies with questionable management, negative operating cashflow have lots of downside in any environment, especially this one. There might be a bounce if the fourth quarter shows a profit, but I would sell that bounce.
April 10th, 2008 at 5:08 pm
Rumours are that sales have been very strong recently and more news of expansion abroad (like the recent South Korea news) is coming. $3 is a bargain for this stock. I don’t share the pessimism of the last poster at all.
May 5th, 2008 at 5:05 pm
I find AeroGrow interesting. Although they have shown any profits yet, they are showing signs of strong sales. If the devices starts to hit the shelves overseas we’ll see some strong growth and a surge in profitability.
I wrote a report myself which you can find here.
http://www.oldschoolvalue.com/2008/05/aerogrow-aero-valuation.html
June 26th, 2008 at 7:25 am
Well, AERO Grow just released fiscal 4th quarter and annual results todaz, and the stock tanked, despite strong sales growth and improving margins.
It’s now a $2 stock and it is clear why. As I suggested in my post in April, the working capital requirements of supporting this business are eating the company alive. Even with solid inventory management - sales are nearly double the year earlier period, while inventory increased 20%, and A/R somewhat more - the cash burn is killing the company.
Even with continued scale in operating targets, the firm is likely to have to consider floating additional equity to provide the cash to get it through the next 18 months. It seems unlikely that it can truly generate enough operating CF to avoid dilution, which is what is driving the market’s response.
The problem is, of course, that lower prices mean more dilution, which further discourages purchase of the stock. If the company had a large enough war chest, I would be encouraged to make an investment at $2 per share, but how many more shares have to be floated to get over the growth phase? I guess we will know more after the conference call.
Looks like there was some reason to show skepticism at $3, after all.