2023-09-06 14:06:37 ET
Summary
- Symbotic Inc. is strategically positioning itself for sustained growth through a multifaceted approach.
- The company’s fiscal third-quarter earnings report, released on July 31, solidified its ascend as a true winner in the supply chain automation sector.
- The integration of AI has accelerated progress in supply chain automation, and the industry outlook has turned favorable due to several other reasons.
- Symbotic's current valuation is concerning, but its stock is likely to bounce higher from here before the reality settles in.
Symbotic Inc. ( SYM ), a leading player in warehouse automation technology, has experienced a remarkable surge in its market value over the past few months, with the company’s stock price rising more than 230% since the beginning of the year. Wall Street has taken interest in Symbotic's cutting-edge technology supporting its growth story and the company’s well-established partnerships with some of the world's largest retail, wholesale, and food & beverage companies. As a result, Symbotic's stock is rapidly becoming a sought-after investment opportunity for growth investors seeking to capitalize on the latest automation trends. The company’s fiscal third-quarter earnings report , released on July 31, solidified its ascend as a true winner in the supply chain automation sector, with the company achieving record revenue and operating margins amid the booming interest in AI-enabled robotics technology for the supply chain. Symbotic stock has lost some momentum since reporting Q3 earnings, with its stock crashing from highs of over $60 to around $40 today. Symbotic still has a long runway to grow, but its current valuation does not seem to account for some of the major risks faced by the company today.
Securing Growth Through Strategic Initiatives
Symbotic Inc. is strategically positioning itself for sustained growth through a multifaceted approach. One key aspect contributing to the strong growth is the company’s outsourcing strategy for deployments. These partnerships are now beginning to yield positive results, and the supplier ecosystem is on an upward trajectory. This strategic move not only contributes to current success but also paves the way for future expansion.
Tom Ernst, the Chief Financial Officer, recently emphasized the importance of building a robust supplier network and outsourcing partners. This network not only supports the existing backlog of $23 billion but also creates additional capacity to accommodate new customers. The company's outsourcing progress to date provides visibility into its ability to achieve these goals. The ongoing effort is to fortify and deepen the supply chain to ensure sustained growth beyond current expectations.
A crucial aspect of this growth strategy is the company's focus on expanding its gross margin. To achieve this, Symbotic is diligently addressing redundant costs associated with rapid growth. As the business continues to expand and shifts toward outsourcing partners, these redundant costs are expected to diminish gradually. This reduction in costs will free up resources that can be reinvested in new growth initiatives.
Looking ahead, the company foresees its growth in the coming year being driven by the ramping up of sites and deployments. This optimism is underpinned by the belief that its outsourcing initiatives have considerable untapped potential. The early benefits seen so far reveal just the tip of the iceberg, and the company remains committed to significant investments in innovation projects, such as the autonomous bot SymBot and the BreakPack project. While these initiatives may temporarily impact the operating margins negatively, they are expected to yield substantial long-term benefits.
Furthermore, the company has formed a groundbreaking venture, GreenBox, in collaboration with SoftBank Group Corp. This venture targets the lucrative warehouse-as-a-service market, which presents a $500 billion annual opportunity. By offering cost-effective solutions to small and medium-sized businesses, the company aims to capture significant value through system contracts and recurring revenue streams. The GreenBox venture is set to order Symbotic's systems over six years, starting in fiscal year 2024, which will substantially expand the reach of Symbotic's AI and automation technology. With this strategic venture, the company aims to keep Symbotic as a pure-play entity and allow GreenBox to serve as a commercial sales force that facilitates seamless operations while catering to diverse customer needs.
Exhibit 1: The expansion of TAM with GreenBox
The addition of approximately $11 billion to the backlog from the GreenBox venture, backed by SoftBank, further solidifies the company's growth prospects. Even in the unlikely scenario where no systems are ordered, the company anticipates positive cash flow, backed by SoftBank, ensuring shareholder protection. With GreenBox's potential for strong returns, Symbotic expects its 35% interest in the GreenBox subscription business to generate a robust cash flow stream.
Rick Cohen, Chairman of Symbotic, said during the Q3 earnings call :
What GreenBox does that is so special is very, very hard for 3PL operators to put multi-tenants in a single facility, and we're hearing that over and over from 3PL operators. And the reason is because they have mispicks, they have errors and it's very hard to keep the inventory under control. Symbotic, and this is what we're seeing over the last six months. I mean if a customer orders a million cases, we ship a million cases, we might have one error, but we might not and we don't even know why we would have that. So, we’re nearly perfect inventory accuracy, perfect shipping accuracy, and that enables a whole new industry and a whole new way of creating these 3PL operations.
Symbotic has secured high-profile deals, including a partnership with Walmart Inc. ( WMT ) to retrofit all 42 regional distribution centers with Symbotic systems over the next 8+ years. Further, collaborations with Associated Food Stores and United Natural Foods, Inc. ( UNFI ) highlight the technology's potential in integrating advanced AI-powered robotics and automation technology into distribution centers, enhancing supply management, improving efficiency, and facilitating growth.
The Favorable Industry Outlook
Smart warehousing, often referred to as Automated Supply Chain Management (ASCM), leverages advanced technologies and software to optimize the movement of goods and services from suppliers to customers. The integration of AI has accelerated progress in supply chain automation, with leading manufacturers in warehouse automation experiencing substantial revenue growth, averaging between 15% to 20% annually since 2014, according to a McKinsey report. The report further shows that the adoption rate for advanced robotics in warehousing and automation technologies in the supply chain remains high with increasing use cases.
Exhibit 2: Innovation and technology adoption in logistics
While Amazon.com, Inc. ( AMZN ) has long been a dominant force in the retail industry, largely due to its extensive network of fulfillment centers worldwide, localized warehousing is becoming the gold standard for achieving fast delivery, setting a high bar for competitors. Warehouse-as-a-service ((WAAS)) and third-party logistics (3PL) offerings have emerged as viable strategies for companies seeking to remain competitive without the need to own and operate massive fulfillment centers. However, most companies, especially SMEs, do not possess the vast resources and infrastructure of Amazon. Labor scarcity is another challenge that organizations are facing. Industry research underscores the magnitude of these issues, with workforce training time, high turnover rates, and the need for digital upskilling topping the list of concerns for supply chain managers. The impending labor shortage in manufacturing, combined with a skills gap, is predicted to result in substantial costs for the United States, reaching an estimated $1 trillion in 2030 and leaving 2.1 million jobs unfilled. This challenging industry landscape has boosted the demand for automation technology, a market that is expected to reach a value of $31.71 billion by 2030 , growing at a compounded annual growth rate (CAGR) of 11.5% between 2022 and 2030.
This is where Symbotic stands out, providing valuable support to companies through its WaaS solutions. By offering innovative and efficient smart warehousing solutions, Symbotic appears well-positioned to help companies navigate the evolving landscape of supply chain management, offering a competitive edge in a rapidly changing and highly competitive industry.
Challenges Worth Monitoring
While Symbotic is poised for growth and success in the smart warehousing industry, the company faces a few notable challenges that need scrutiny. One of the significant challenges lies in Symbotic’s revenue model. The company heavily relies on one-time sales of its warehouse automation systems which account for 97% of its revenue, with recurring revenue sources which include software licensing and service contracts accounting for only 3% of its total revenue. A low percentage of recurring revenue poses challenges in forecasting the company's future financial performance, which can deter investors and analysts.
Symbotic's significant customer concentration, particularly on Walmart’s business, presents a considerable challenge as well. A substantial portion of its backlog is closely tied to this major customer, which exposes the company to potential revenue fluctuations. The company's Q3 revenue increase was driven by 33 system deployments in progress, a notable surge compared to the 13 deployments in progress during the previous year. According to company filings, this growth primarily came on the back of an ongoing Master Automation Agreement with Walmart.
Under this agreement, Symbotic is responsible for installing and implementing its warehouse automation systems across all of Walmart's 42 regional distribution centers. While this partnership has contributed to revenue growth, it also underscores the company's dependency on a single client. As the installation and implementation process extends through fiscal year 2028, the concentration risk remains a significant factor that Symbotic must carefully manage to ensure long-term stability and resilience in its revenue streams.
Additionally, GreenBox presents both opportunities and challenges. While this venture opens doors to a potentially lucrative market, the company expects a customer launch to occur sometime in 2024. This delay in revenue realization could impact the company’s financial performance. On a positive note, Symbotic benefits from a niche market position with limited direct competition, giving it an advantage in fulfilling physical store orders for large retailers and distributors.
The Concerning Valuation
Wall Street analysts expect Symbotic to turn profitable in FY 2024 with the company's EPS expected to hit 24 cents. This expectation seems reasonable given that the company's losses have shrunk with its expanding scale. For the June quarter, Symbotic reported a net loss of $4.3 million on revenue of $312 million. In comparison, a couple of years ago in 2021, the company booked a net loss of $38 million on revenue of $131.5 million. For context, just over a couple of years ago in March 2021, Symbotic's operating losses exceeded revenue but today, operating losses have shrunk to around 13% of revenue. These are early indications of the company's ability to turn profitable with growing scale.
Although these are promising signs, I believe Symbotic's valuation leaves investors with no margin of safety today at a forward P/S multiple of more than 3. The non-recurring nature of the majority of Symbotic's revenue, coupled with the lack of durable competitive advantages suggests there is room for disruption in the supply chain automation sector. As a long-term-oriented growth investor, I prefer investing in companies with identifiable competitive advantages, and I believe Symbotic has none at the moment.
Although I believe a valuation reality check is on the cards, I would not be surprised if Symbotic stock bounces higher from the current levels before this reality check settles in. Earnings revisions have trended positively in the last 90 days, which suggests there will be strong momentum behind Symbotic stock in the foreseeable future.
Takeaway
Symbotic registered impressive growth in the last few quarters driven by its innovative technology and strategic initiatives. The company’s partnership with Walmart further validates its potential to revolutionize supply chain operations. The company's outsourcing strategy, GreenBox venture, and potential high-profile collaborations with industry giants in the future position the company for sustained growth and expansion. As the smart warehousing industry continues to evolve and address challenges arising from labor shortages, Symbotic appears well-positioned to capitalize on the growth opportunities available in the automation sector. However, Symbotic faces several challenges that warrant careful consideration and the company's current valuation does not seem to accurately reflect these risks.
For further details see:
Symbotic: More Gains Ahead Before A Valuation Reality Check