Bots In The Backroom

By: subSPAC

EXECUTIVE SUMMARY

• In the aftermath of a stellar third-quarter earnings release, Symbotic, a warehouse automation company, exceeded the expectations of even the most bullish earnings forecasts.
• Propelled by the encouraging financial performance, the company’s stock value skyrocketed to over $62 per share, catapulting the company’s market cap to over $35 billion.
• There are several reasons to be optimistic, given that the company is riding multiple tailwinds. 

DETAIL

In the aftermath of a stellar third-quarter earnings release, Symbotic, a warehouse automation company, exceeded the expectations of even the most bullish earnings forecasts. Propelled by the encouraging financial performance, the company’s stock value skyrocketed to over $62 per share, catapulting the company’s market cap to over $35 billion. There are several reasons to be optimistic, given that the company is riding multiple tailwinds. 

The total addressable market for the company is rising at a rapid pace, powered by robust investment inflows from e-commerce and retail companies in the post-pandemic era to bolster their supply chains. Additionally, Symbotic’s growing backlog, coupled with margin expansion for hardware from cost optimizations, suggests room for further growth. 

However, despite all of these tailwinds, there is a cause for concern. Diving deep into the company reveals potential vulnerabilities, particularly concerning Symbotic’s dependency on heavyweights like Walmart and SoftBank for a significant slice of its backlog. Also, the high upfront costs associated with the installation of warehouse automation systems and the limited high-margin recurring software revenue, until it scales its systems, may prove problematic over the medium term.

All of this prompts if Symbiotic’s lofty valuation is truly warranted in light of the recent run-up in the stock.

Bots and Boxes

For those unfamiliar, Massachusetts-based Symbotic sits at the cutting edge of supply chain automation, specializing in offering comprehensive warehouse solutions, integrating both hardware and software. The company’s vision-enabled autonomous robots are designed to maximize inventory density, which can result in a substantial reduction in warehouse footprint by 30% to 60%. Symbotic has identified a total addressable market exceeding $420 billion, thanks to the potential to equip more than 6,500 distribution centers with its robots on a global scale.

The company’s growth trajectory isn’t limited to the sheer scale of the opportunity alone. Instead, it is poised to benefit from the sweeping wave of investment in supply chain infrastructure following the pandemic. A majority of retailers and e-commerce platforms, having learned a hard lesson from the fragility of supply chains in recent years, are readying to invest billions in upgrading their warehousing capabilities. 

More recently, Symbotic has joined forces with SoftBank to create a joint Warehouse-as-a-Service venture called GreenBox Systems. GreenBox aims to transform supply chain networks worldwide by implementing Symbotic’s advanced AI and automation technology, thereby making warehouses more efficient. The two companies anticipate that this venture will reduce inventory costs, increase SKU count, and enhance agility for their customers without requiring significant capital expenditures or increasing operational complexity.

At the time of the announcement, Symbotic unveiled a hefty $7.5 billion new customer contract with GreenBox, which will exclusively provide Symbotic systems in the Warehouse-as-a-Service market and make supply chain services widely available to customers. This partnership with GreenBox is expected to add a further $500 billion to Symbotic’s addressable market. Symbotic, owning 35% of this partnership, plans to initiate the rollout in 2024 and projects to generate over $500 million in annual recurring revenue from GreenBox within six years of becoming fully operational.

Margins, Markets, and Missteps

While Symbotic’s projected addressable market appears to touch the tantalizing $1 trillion mark, it’s essential to view this figure with some measure of skepticism. Given the competitive landscape of the market, it’s likely to saturate over the coming two decades as multiple players vying for a share. Once this saturation occurs, Symbotic’s revenue streams will narrow down primarily to recurring software revenue and hardware revenue from system replacements and upgrades. In such a scenario, the total addressable market (TAM) may not serve as an accurate barometer for the potential annual revenues. Another significant point of concern is the customer concentration that Symbotic exhibits.

Nearly two-thirds of the company’s revenues flow from a single source: retail giant, Walmart. Symbotic is slated to install systems in nearly 42 Walmart Regional distribution centers, accounting for almost a third of the backlog, a task that would span over eight years to complete. While other clients include C&S Wholesale, Albertsons, Giant Tiger, and Target, making up a third of the company’s revenues, the customer base remains relatively narrow. 

The joint venture with GreenBox is expected to provide much-needed customer diversification by targeting small and medium retailers, but the effectiveness of this strategy remains to be seen. One more point of worry is the nature of Symbotic’s business model. The company needs to first win over customers by installing its hardware, a process associated with higher upfront installation costs.

Considering the 20% gross margins for hardware installation compared to the 60% gross margins for software, overall margins are likely to remain relatively low for the next six to seven years as the company works towards scaling its solutions. Even if Symbotic successfully secures a wide install base, the lifecycle of Symbotic’s automation hardware is estimated to be around 25-30 years. Given this limited lifespan, revenue growth is anticipated to plateau eventually.

All these factors raise pressing questions about the company’s revenue run rate, long-term margins, and the justification of its current valuation.

Financials and Valuation 

In Q3 of 2023, Symbotic reported revenues of $312 million and net loss of $39 million. This marks a steep rise in revenue from the same quarter in the previous year when Symbotic netted $176 million, but losses have slightly seen an uptick from the $33 million in the previous year. As of the end of the third quarter, Symbotic boasted an impressive backlog worth $23 billion. The company reported ten fully operational warehouses with an additional 33 in the pipeline.

Looking ahead to Q4, Symbotic anticipates revenues to range between $290 million and $310 million. Such a performance would put the company on track to surpass the $1 billion mark in annual revenues for the first time. Additionally, the company predicts that it could finally reach positive EBITDA in the fourth quarter, with projections ranging from zero to $3 million.

In the wake of a recent surge in stock price, Symbotic’s shares have marginally declined to approximately $53, yielding a market cap nearing $30 billion. This valuation implies a forward price/sales multiple of nearly 28x, a steep figure considering the limited market, hardware’s low margins, and the escalating competition.

Competition for Symbotic includes industry players like Kiva Systems (acquired by Amazon), Berkshire Grey, and traditional alternatives such as Honeywell, Swisslog, and Witron. All these companies currently trade at much lower revenue multiples and, for the most part, are profitable, making Symbotic’s valuation stand out further and harder to justify. 

Bottom Line 

Symbotic has made strides in a niche and growing market, with significant contracts and a promising joint venture adding fuel to its growth. However, the reliance on a few major customers, the hardware-centric revenue model, and the looming market saturation pose substantial risks. Going forward, the real test for Symbotic lies in its ability to diversify its customer base, augment recurring software revenue, and maintain a competitive edge in a market filled with established and emerging players. 

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Originally Posted August 7, 2023 – Bots In The Backroom