2023-07-10 12:51:54 ET
Summary
- Symbotic is experiencing rapid growth on the back of deployment within Walmart’s distribution centers. Adoption outside large customers is currently weak though.
- The company's revenue comes from the sale of long-lived assets, and once market saturation is reached, Symbotic will be dependent on recurring revenue, upgrades, and system replacements.
- Symbotic's poor margins, low recurring revenues, and customer concentration create significant downside risk.
Symbotic ( SYM ) is a leading provider of warehouse automation systems, with growth currently being driven by systems deployment within Walmart's ( WMT ) distribution centers. While this will be supportive of Symbotic's business for an extended period of time, adoption outside of large customers is currently weak. In addition, margins are poor and recurring revenues are low. Despite strong growth, these factors make paying a high multiple for the stock extremely risky.
Market
Symbotic is a leading provider of warehouse automation systems, but warehouse automation is not a homogeneous problem that is amenable to a standardized solution. Technology requirements can vary significantly depending on the type, volume and variety of products being handled, as well as the stage in the supply chain.
Distribution centers are utilized earlier in the supply chain and help to distribute items through the supply chain. Throughput is generally high and variety low. Fulfillment centers distribute items to end customers and hence are more distributed and deal with smaller volumes and greater variety. These properties generally mean that distribution centers are easier to automate.
Figure 1: Distribution versus Fulfillment (Source: Symbotic)
Symbotic's current solutions appear to be more targeted at distribution centers. Finished goods generally enter the supply chain packaged in either pallets or cases and Symbotic's systems automate pallet-to-case activities, before moving products to storage. The company believes this is an important activity as the majority of supply chain cost resides in the distribution center.
Symbotic also offers automated pallet-building for fulfilment and is working on solutions that would be more targeted at micro-fulfillment. Symbotic's pallet-building application builds pallets specific to a given store in a manner that facilitates shifting goods from the pallet to a store's shelves.
Symbotic has estimated the size of its addressable market based on the total potential spend on its systems over the next 15 years. The company is initially focused on the general merchandise, ambient grocery, ambient food distribution, consumer packaged food, and apparel verticals in North America. There are over 1,500 warehouses in North America in these verticals.
Symbotic believes that its SAM for these verticals in North America is around 133 billion USD. This expands to 393 billion USD when considering adjacent verticals and the European market. Symbotic's total addressable market estimate is based on a potential target market of over 6,500 distribution centers globally.
Asia is currently excluded from estimates. For other countries, Symbotic's estimate is based on the number of warehouses in the US and the relative GDP of the relevant country. This seems like a highly questionable methodology given that population density varies significantly across countries and is likely to impact logistics infrastructure. The makeup of GDP also varies across countries, meaning that GDP is likely to be a poor indicator of the number of warehouses for some countries, like Switzerland or Norway.
More importantly, most of Symbotic's revenue comes from the sale of long-lived assets. Once market saturation is reached, Symbotic will be dependent on recurring revenue, upgrades, system replacements, etc. This makes the given TAM a poor indicator of the potential revenue that Symbotic could generate in any one year.
Figure 2: Symbotic's Strategically Addressed Markets (Source: Symbotic)
Another important consideration is the supply chain investment boom caused by the pandemic. An enormous amount of investment has been directed into areas like shipping, warehouses and trucking over the past few years on the back of extremely tight supply chains. Many of these areas now have excess capacity which will take an extended period for the market to grow into. This is likely to be less of a concern for Symbotic though, given the growing importance of automation solutions and relatively low market penetration. According to Berkshire Grey ( BGRY ), only about 5% of warehouses are currently automated, and 90% of picking is still performed manually.
Figure 3: Warehouse Investment in the US (Source: Created by author using data from The Federal Reserve)
Symbotic
Symbotic provides end-to-end robotic automation solutions for supply chains. The company is still relatively small but is already automating the processing of pallets and cases in distribution centers for some of the largest retailers in the world.
Symbotic has taken a modular approach which enables flexibility in deployment. It also allows systems to be scaled as needed. As a result, its systems vary in size and price. Symbotic specifically mentions systems with a footprint as small as 48,000 square feet serving 25 or more stores.
Activities performed by Symbotic's platform include:
- Offloading merchandise from delivery trucks.
- Atomizing inbound freight from pallets-to-cases and cases-to-items.
- Digitizing the attributes of units.
- Moving units to storage.
- Preparing units for delivery to a store, pick-up location or individual.
Symbotic plans on adding additional modular applications in the future that will support all omnichannel strategies (brick-and-mortar retail and e-commerce with in-store pickup or home delivery) from a single centralized facility.
Performing these types of activities necessitates a range of technology, like mobile robots for moving inventory and robotic arms for picking and packing.
Symbotic's platform is composed of:
- Atomizing robotics.
- A buffering structure.
- Autonomous mobile robots that handle product.
- Robotic palletizing cells.
- Software that coordinates and optimizes movements.
Figure 4: Solution Overview (Source: Symbotic)
Symbotic believes the architecture of its system differentiates it from competitors, but it is not clear that any advantage the company has will be sustainable. Some of the unique features of Symbotic's platform include:
- High-speed (up to 25 mph) autonomous "robots" to move goods through the buffering structure.
- Robots which are not confined to fixed routes.
- Capacitors that enable robots to maintain charge while in use.
- Space efficient layout which helps to minimize the footprint and allows installation without interrupting operations.
- Software that coordinates activities, including interfacing with non-Symbotic equipment.
None of this is necessarily difficult to replicate though, and in some cases already exists on the market. Operating in a controlled environment with limited product variety makes distribution center automation an easier problem to solve. Additionally, with rapidly improving technology, these types of capabilities may become commonplace in the next few years.
Symbotic's success seems to be based more on the system than its individual components. This isn't a case of a new technology looking for a problem to solve. Symbotic's founder has a deep understanding of logistics and has created an end-to-end system that works. Rapid adoption by Walmart, a company known for operational excellence, is a clear validation of Symbotic's systems.
Symbotic is currently growing rapidly, but this growth is occurring within a small customer base addressing similar use cases. The company first expects to expand its customer base, before adding new verticals, new geographies and expanding its product suite. To justify its valuation, each of these initiatives will need to be successful, particularly the introduction of new products.
Figure 5: Symbotic Expansion Plans (Source: Symbotic)
Symbotic believes that its platform:
- Accelerates the movement of goods through the supply chain.
- Improves SKU agility.
- Fulfills orders with extremely high accuracy.
- Reduces inventory requirements.
- Reduces operating costs.
Figure 6: System Benefits (Source: Symbotic)
Warehouse automation is clearly valuable, but it is less clear how this value will be distributed. Symbotic believes that its system enables food retailers and wholesalers to cut distribution-center labor costs by 80% . In addition, Target has found that Symbotic's solution can reduce new warehouse footprint requirements by 25-40%. Symbotic won't have a monopoly, and a concentrated pool of cost sensitive customers won't be conducive to high margins. Unless Symbotic can maintain a technology lead, customers are far more likely to benefit from warehouse automation than vendors.
Walmart is Symbotic's largest customer, accounting for roughly 67% of total revenue in FY2021 and a majority of the company's backlog. Symbotic's systems are being installed in 42 of Walmart's regional distribution centers, accounting for billions of dollars backlog. As part of the agreement with Walmart, Symbotic has agreed to restrictions on its ability to sell or license its products and services to one specified company (Amazon ( AMZN )?).
There is considerable uncertainty regarding Symbotic's revenue once the deployment of systems within Walmart is complete, but this is a longer-term concern as Symbotic believes the rollout will take more than 8 years to complete. If Symbotic fails to significantly expand its customer base, revenue could fall significantly after the Amazon deployment is complete.
C&S Wholesale Grocers is another important customer of Symbotic and is also an affiliate. Symbotic's Founder, Board Chair, President and Chief Product Officer (Richard Cohen) is also the Executive Chairman of C&S Wholesale Grocers. Mr. Cohen and trusts for the benefit of his family are also the only beneficial stockholders of C&S Wholesale Grocers. Net sales to C&S Wholesale Grocers, Albertsons ( ACI ), Giant Tiger ( OTCPK:NNWWF ) and Target ( TGT ) accounted for approximately 33% of Symbotic's total revenue in FY2021.
This customer concentration is concerning but is probably somewhat inevitable given the pool of potential customers. The combination of non-recurring revenue and customer concentration create significant downside risk though. If Symbotic's technology isn't widely adopted outside of these core customers, revenue may dry up in a few years when the company has completely penetrated these customers.
Competitors
Symbotic faces competition from a range of companies, including:
- Point solutions - Grey Orange, Locus Robotics, Vecna, OPEX, Fetch and Berkshire Grey.
- End-to-end solutions - Witron, Honeywell ( HON ), Dematic, Vanderlande, SSI Schaefer and Swisslog.
- Ecommerce solutions - Exotec, Ocado and AutoStore.
Figure 8: Alternative Warehouse Management Solutions (Source: Symbotic)
Amazon is not a direct competitor as it does not offer its warehouse automation technology to the market. It is an interesting comparison though as it is probably the leader in the space. Amazon has something like 1,200 distribution centers of various types in the US. Of these, around 300 are large-scale fulfillment centers with an average of 800,000 square feet of storage space.
Amazon acquired Kiva in 2012 for 775 million USD to support the development of more efficient operations. The company chose not to continue offering Kiva products though, choosing instead to use the technology as a source of competitive advantage. Kiva was founded in the early 2000s to address the inflexibility of existing material handling systems and the high cost of order fulfillment.
At the time of acquisition, Kiva's robots were guided and speed limited (2.9 mph). They were also battery-powered and needed to be recharged every hour for five minutes. Amazon has continued to build on its robotic capabilities since the Kiva acquisition, recently unveiling the autonomous mobile robot Proteus . Proteus has a similar design to Kiva robots, but it is able to move freely amongst workers.
Financial Analysis
Symbotic's revenue was 267 million USD in the second quarter of FY2023, a 177% increase YoY. The company now has 9 fully operational systems and is in the process of deploying an additional 28 systems. These systems are currently dominating growth, with the company initiating seven new system deployments in the second quarter. One system was advanced to full operation in the quarter. Recurring revenue is also increasing as more systems move into production, but recurring revenue is still extremely low. Symbotic's backlog in the second quarter remained unchanged at 12 billion USD and no new customers were booked in the quarter.
Revenue is expected to be between 245 and 265 million USD in the third quarter of FY2023, which would only represent 45% growth YoY. Revenue is likely to be lumpy so this may not be important, but revenue has also been fairly flat over the past 3 quarters.
Figure 9: Symbotic Revenue (Source: Created by author using data from Symbotic)
Symbotic's gross profit margins have been hovering in the mid to high teens range, driven primarily by margins on systems. Longer-term Symbotic expects that gross margins on systems revenue will be closer to 30%. Deployment efficiency is improving due to standardization, process streamlining and outsourcing. Recurring revenue is expected to have a gross margin in the 50-60% range and contribute a larger proportion of total revenue over time. Symbotic has indicated an overall gross profit margin of around 40%, which would suggest a roughly even split between system and recurring revenue in the future.
Figure 10: Symbotic Gross Profit Margins (Source: Created by author using data from Symbotic)
Despite low gross profit margins, operating losses are only modest as overhead expenses are relatively low. Symbotic has demonstrated limited operating leverage so far though as the company appears to be increasing its investments in R&D and sales and marketing in line with revenue growth. Given the size of the market, and Symbotic's need to develop technology to address additional use cases, this situation is likely to continue for the foreseeable future.
Figure 11: Symbotic Profit Margins (Source: Created by author using data from Symbotic)
Valuation
Symbotic's valuation is somewhat bizarre. The company is growing rapidly but most of this is non-recurring revenue. In addition, margins are poor and it is not really clear that Symbotic has a sustainable competitive advantage. Customer concentration could also become a problem once the Walmart deployments are complete.
Kiva Systems and Berkshire Grey are valid benchmarks for the value of warehouse automation technology. Amazon acquired Kiva Systems for 775 million USD in 2012 and Berkshire Grey is currently only worth around 340 million USD. While Symbotic's business is clearly worth more than this, it is a sanity check.
Symbotic's platform has a useful life of 25-30 years. This is problematic as recurring revenue is only modest and system revenue will eventually stagnate at a modest level. While Symbotic indicates it has a large addressable market, the annual revenue opportunity is probably under 50 billion USD at maturity. Given that Symbotic already has nearly a 24 billion USD market capitalization, it is difficult to see the stock performing well in the long run. Based on a discounted cash flow analysis I estimate that the stock should be worth closer to 15 USD per share, assuming the business is a success going forward.
While Symbotic's stock is overvalued, it could continue to do well in the near term driven by AI hype and deployment growth. Despite this, it is likely the bubble will burst when backlog and deployment growth begin to stall. Trying to benefit from the downside may be difficult though, as the stock is closely held and short interest is also relatively high. There is also no clear catalyst to drive a rerating of the stock, meaning the stock price may remain elevated for an extended period of time. Given short borrowing costs and the volatility of the stock, there is a high risk of short sellers and investors in Put options slowly bleeding out waiting for the stock price to decline.
For further details see:
Symbotic: A Bubble Waiting To Burst