SYM - Symbotic: Growing Into A Leader In Warehouse Automation

Summary

• Symbotic has one of the strongest contracted backlog of $12 billion, which is still growing and management expects to add one to two new customers each year.
• Symbotic is bringing on and ramping up new Tier 1 outsourcing partners expected to help ramp up capacity and drive costs down in the near term.
• Management expects that we have seen the low watermark for cash on balance sheet in the last quarter, with more than sufficient cash to execute on its long-term growth plans.
• The company sees strong interest from potential customers in international markets like Europe, Japan and Mexico.
• My 1-year price target for Symbotic is $21. This implies 27% upside potential from current levels.

This article was first posted in Outperforming the Market on 1 March 2023.

Investment thesis

Symbotic's ( SYM ) end to end solutions enable customers to modernize their warehouses today and help them drive efficiencies and cost improvements.

The company's $12 billion contracted backlog is testament to the strong suite of products and solutions it provides. With such a strong contracted backlog, management remains committed to scale up rapidly over the near-term, identifying Tier 1 outsourcing partners that will enable it to scale up rapidly and drive costs down in the future.

In addition, the company expects that the cash on its balance sheet and gross margins in the prior quarter were likely the low watermark, implying that they expect that the business to generate cash flows and see improvements in margins going forward as they scale up and the benefits of utilizing the outsourcing partners materializes.

Furthermore, despite the rapid growth we have seen, I like that management remains committed to adding one to two new customers to its backlog each year, while the strong interest seen in the international markets like Europe and Japan provide an opportunity for Symbotic to expand into these markets.

In the long run, I think that Symbotic looks like a winner in the warehouse automation space as it continues to have the necessary financial resources needed to execute its growth strategy, and its strong contracted backlog provides visibility into the future growth of the company.

I have written a previous article on Symbotic, highlighting why I think that the company is a leading warehouse automation and robotics player with a significant growth runway ahead of it. I have also done a quick scan research article into the company for members of Outperforming the Market as there has been interest in the stock.

Strong backlog continues to grow

Symbotic continue to have a strong contracted backlog, expanding it from the prior quarter to $12 billion in the current quarter.

This increase in the backlog of about $900 million in the first quarter of FY2023 was a result of a few things.

The first was the agreement signed between Symbotic and United Natural Foods ( UNFI ). UNFI decided to use Symbotic's robotics and software automation in five of its distribution centers over the next four years, with an option to use Symbotic's warehouse automation system in UNFI's other distribution centers.

The other reasons for the increase in the backlog include an existing customer adding new deployments and an upward adjustment in the pricing of the existing backlog, which is expected at the start of each calendar year.

Management continues to engage actively with the opportunity they have before them and looks to add one to two new customers each year.

Growing list of Tier 1 outsourcing partners

Management executed well on its plans that it highlighted in the previous quarter that it plans to expand on its current group of outsourcing partners. In the first quarter of FY2023, management worked on identifying and securing more Tier 1 suppliers that will help Symbotic grow its capacity and meet more of its customers' needs and to improve on the resilience of its supply chain.

In terms of timeline, management expects that in the next quarter or two, we will see the full benefits of the outsourcing of these suppliers as these suppliers ramp up over time. This, in turn, will diversify its mix of outsourcing suppliers and help to reduce reliance on any one particular outsourcing partner.

In addition, as these outsourcing suppliers ramp up, there are also improved cost efficiencies to be expected as these Tier 1 suppliers optimize the production process and learn to make these systems better. As a result, with the continued ramp up of these outsourcing partners, this will lead to better cost drive downs.

Sufficient cash for growth plans

Management commented that its $353 million in cash from the last quarter's results will likely be a low watermark.

In the first quarter of FY2023, Symbotic grew its cash on the balance sheet by $94 million, to $448 million as a result of favorable improvements in working capital.

Management commented that based on this $448 million in cash balance on its balance sheet, they believe that the company has more than sufficient resources today to execute on its growth plans.

International business looks promising

During the first quarter of FY2023 earnings call, management highlighted several countries in which they have seen some interest . This includes countries like Mexico, Japan and there's also interest from Europe. These international markets typically have labor markets that are very costly, and this is where Symbotic products and services will be of good value add.

That said, announcements in the international markets could take some time as the sales cycle there is relatively long and although management is seeing lots of interest, the company has nothing to announce in the near-term.

In addition, management is looking to identify and secure outsourcing partners in Europe that will help with its future business in the region.

Strong topline growth

Revenue for the first quarter of FY2023 grew by 168% to $206 million . There were six new system deployments that Symbotic initiated during the first quarter, and one system was advanced to full functional production operations.

Symbotic now has 22 active system deployments with several customers, up from the 17 systems from last quarter and 9 systems from the prior year,

Thus, the revenue growth that Symbotic saw in the first quarter of FY2023 was a result of the six new system deployments started in the quarter the progress made on existing deployments.

Management also commented that the team is seeing improving efficiency as they standardize their systems, streamline their deployment process and ultimately, realize their outsourcing benefits.

Improvement in gross margin and EBITDA loss rate

The gross margin reported in the first quarter of FY2023 was up 230 basis points sequentially.

This provides further reassurance to me that like what management stated in the prior quarter, its gross margin reported last quarter of 15% was the low watermark.

Management stated that this improvement in gross margin sequentially was despite the substantial cost of scaling up its business as well as higher steel costs.

Symbotic achieved a record 7.9% adjusted EBITDA loss rate of 7.9%, a significant improvement from the 27.6% in the prior year. This was a result of the rapid rise in revenue while operating expenses moderated, demonstrating strong operating leverage in the business.

Outlook

Management expects that in the second quarter of FY2023, Symbotic will grow at about 126% revenue growth in the midpoint. In addition, management expects that adjusted EBITDA loss will come in at $15 million in the midpoint. This represents a sequential improvement in adjusted EBITDA loss rate of 6.9% in the midpoint.

Valuation

My 1-year price target for Symbotic is $21. This implies 27% upside potential from current levels.

The company is currently trading at 5.6x 2024 EV to Sales and 77.4x 2024 Price to Earnings.

I assume a 45x 2025 P/E multiple. Given that Symbotic is rapidly growing earnings in the next few years as a result of improving operating leverage, expanding margins and increasing scale, I think that the company should be trading at a higher multiple than peers. In addition, I would also apply a premium multiple to the company given the fact that Symbotic is also seeing improving margins and profitability.

Risks

Supply chain risks

Symbotic did highlight supply chain risks as a risk for the business, although management did highlight that the business supply chain is seeing improvements, along with the addition of new outsourcing partners. That said, if constraints to the supply chain return, this could result in Symbotic's business facing headwinds in the near-term.

Risk of not ramping up capacity fast enough

Currently, Symbotic has a large backlog of $12 billion and it still plans to add one or two new customers each year. I think there is a risk that Symbotic is unable to ramp up its production capacity fast enough to accommodate to the rising demand from both existing and new customers.

Symbotic needs to be able to efficiently ramp up capacity in the near-term to show potential customers that it is able to provide them with what they need when they need it.

Conclusion

I think that management has executed its strategy well, demonstrating confidence to investors that the company is improving both its cash flow profile and margin profile. Management has reassured investors that the prior quarter's cash balance was likely the low watermark for the business as they expect cash flows to improve from here. Furthermore, management also expects the prior quarter gross margins to be the low watermark as they expect that the improving scale and benefits from outsourcing partners will drive margin trajectory upwards.

Growth continues to remain strong as the business continues to have momentum, with the contracted backlog growing $900 million in the quarter to $12 billion. Furthermore, management expects to add one to two new customers to the backlog each year, suggesting that the growth momentum in the business is sustainable over the long-term.

My 1-year price target for Symbotic stock is $21. This implies 27% upside potential from current levels.

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