AquaBounty Technologies (NASDAQ: AQB) is a company that is continuously expanding in the evolving RAS space, renovating the entire salmon industry. Recently, it closed a public offering to finance a production facility of 10,000 metric tons of their AquAdvantage Salmon (AAS). AQB's new farm is expected to be constructed in 2021. According to comparable analysis to one of AQB's U.S.-based competitors – Atlantic Sapphire (OTCQX: AASZF), the company's market cap could be double after the farm construction is finished. Furthermore, the institutional ownership of AQB is exceptionally high, indicating a positive outlook belief.
Future changing consumer preferences towards GMOs could become uncertain, as consumers would turn to conventionally farmed salmon instead, reducing projected revenue streams.
AquaBounty has been researching, developing and commercializing genetically modified salmon (GMO) for more than three years. One of the most significant advantages of genetically modified salmon is that salmon can grow faster than conventionally farmed salmon. It creates an opportunity for AquaBounty after the FDA approved "AquAdvantage Salmon" (AAS) for consumption in 2015.
However, there is one potential risk. The company needs to strictly control and eliminate the risk of genetic mixing between traditional salmon and AAS. The U.S. government has many strict rules to control that risk. The company has been forced to grow its A.A.s in land-based Recirculating Aquaculture System (RAS). RAS offers many advantages over traditional farming: less feed, fewer parasites and diseases, no antibiotics, and 98% re-used water. It may seem to favour environmentally oriented consumers, which could be the primary revenue driver in the future. So far, the company operates three salmon farms, both in the U.S. and Canada. Two of these are for the commercial growth of salmon, and one of them for R&D purposes.
Currently, the company is traded at $5.83 as of this writing with a market cap of $421M. The company issued a public offering of $127.1M to expand and construct a new commercial farm. The purpose of the new farm is to increase the production level of AAS. With the new farm, the company will generate more production and lead to higher revenue and profits. However, the construction of the new farm will be started in the first half of 2021. It means that the benefit of the new farm will not be reflected on this year's financial statement.
AQB's goal is to have at least 50,000 metric tons of AAS by 2028 by constructing 4 to 5 farms with a production capacity of 10,000 metric tons per farm. The cost of each farm is in the range of $140M-$175M and will most likely be financed via issuing equity and/or debt. As a result, new issues of equity would dilute the existing shareholders if it ever happened.
Analyst projections estimate revenues to increase to $5M in 2021 and $10M in 2022 as several harvests of salmon taking place in 2021, which will potentially boost its revenue and profit. Furthermore, analysts estimate share-dilution would be about 5-6x the current outstanding amount of shares in the next 6-8 years as the company requires a large amount of cash to build its new farms.
It is better to use the relative comparison method to value AQB as other valuation techniques are infeasible. By comparing AquaBounty with Atlantic Sapphire, its main competitor in the RAS space, it will provide a relatively precise estimate of the valuation of AquaBounty.
Atlantic Sapphire valued at $1.32B with a production capability of 10,000 mt. In comparison, the current market cap of AQB is $421M, which means there is a 3x upside when the third farm is ready for production.
Most of the shares are held by 99 institutions, with a total of 95%. The Top 5 institutional holders are Third Security, LLC; ARK Investment Management, LLC; Vanguard Group, Inc.; EPIQ Partners, LLC; Blackrock Inc., with the range of purchased prices between $4.64 and $8.76. The reported date was on Dec. 30th, 2020. The Top 5 mutual fund holders are ARK ETF Tr-ARK Genomic Revolution ETF; Vanguard Total Stock Market Index Fund; Vanguard Extended Market Index Fund; Entrepreneur Shares Ser Tr-ERShares U.S. Small Cap Fund; Fidelity Extended Market Index Fund, with a range of purchased price between $6.70 and $9.97. Therefore, institutional holdings are extraordinarily high, suggesting future belief in the company.
First of all, AQB is a company with an annual loss of $6.55M, and it will keep such a trend, at least in the short term. Moreover, the company also needs to invest in R&D continuously. It further deteriorates the profitability of the firm. Investors will require a long period to see the company making a positive profit.
Secondly, consumers' preferences are hard to guess. There is a high chance that projected revenue streams fail to materialize as consumers turn to purchase conventionally farmed non-GMO salmon. Its risks are more characteristics of sector-risks for the entire early-stage RAS and GMO-salmon industry. However, the market seems to gradually realize the value of GMOs, as evidenced by AQB's future intentions of expanding internationally to Isreal, Brazil and China.
AquaBounty (AQB) is a small-cap stock with a market cap under $421 million as of this writing. AQB is still in its early stage, where it requires a large amount of funds for R&D and farm development. Besides that, AQB also has to bear the risk of consumers against genetically modified foods. However, if it builds five farms as it plans and finds receptive consumers, it believes it could generate around $350 million in annual revenue. From there, AquaBounty would be established enough to kick expansion into high gear, possibly even building farms internationally.
Based on a rough comparable analysis, the company's value should increase by at least 3x when the third farm is ready to be used. Remember, the company requires much capital for its farm constructions in the future. It would be a buy signal for AQB, with a significant catalyst being the announcing of the third farm building.