Symbotic: A Fast-Growing Supply Chain Automation Company

Thesis on Investment

Symbotic, ( SYM NASDAQ ) is one of the top-performing companies in the market this year. Its stock has already risen by nearly 290% due to the growing interest in AI (artificial Intelligence). The company’s end-to-end warehouse automation system is well-positioned for the rapid growth of the logistics market. The valuation of the company has become extremely high after the rally. This will likely limit its near-term potential for growth.

Why Use Symbotic?

Symbotic, a technology company based in Massachusetts that specializes supply chain automation. The company offers a complete automated warehouse system, which includes both hardware and software. Hardware includes vision-enabled, autonomous robots. Mobile robots and robotic arm) are used to induct, store, and retrieve products from a structure. Software is responsible for routing these robots, sequencing them, planning and orchestrating their work.

Symbotic’s system has over 490 patents, both pending and existing. It also boasts multiple competitive advantages. Its unique storage structure, for example, maximizes inventory density, capacity and reduces warehouse footprint by 30% to 60%. The robots also have machine-learning abilities, which allows them to optimize and improve their performance with time. Its robots’ vision and sensing capabilities also increase the accuracy and reliability in their decisions.

Customers benefit from the system’s high ROI (return-on-investment). A company claims that $50 million invested in the system could result in $250 million savings over its lifetime (25 Years), and outbound efficiency can improve by 5x-9x. The company was able to secure multiple high-profile customers, including Walmart ( WMT), Target( TGT),and Albertsons ( ACI). The company only currently serves US grocery and general merchandise companies. A potential expansion into new verticals and geographical locations could significantly increase its growth.

Huge Market Opportunity

The logistics automation market is a large and rapidly growing opportunity. Precedence Research predicts that the market will grow from $52,6 billion in 2021, to $162.5 in 2030. This represents a CAGR of 13.2%. Symbotic, on the other hand, is more optimistic. It expects that its addressable serviceable market will reach $400 billion by 2030. Market growth is accelerating due to the expansion of commerce, particularly around ecommerce and omnichannel (e.g. Buy online and pick up in store.

The complexity of logistical processes is increasing due to the increase in retail channels. The initial cost of the system is high, but there are many long-term advantages. Automation can help the company increase its operating efficiency while reducing costs. Coupang, a South Korean ecommerce giant ( CPNG ) uses automation robots in its fulfillment centres. This is a crucial factor for its profitability. Logistics automation will be an area of investment for retail companies that is likely to continue.

Mixed Financials

Symbotic is showing strong revenue growth, but profitability remains a concern. The company has reported revenues of $256.6 million for Q1, an increase of 177% over the previous year. Costs, however, jumped 182% between $79.4 and $224 million. Operating expenses increased by 114%, from $46.9 to $100.6 millions. The net loss increased by 85.3%, from $(29.9) to $(55.4) millions or 20% of revenue.

Costs are high at the beginning of the contract due to the nature of the product. The company must put everything into place. Profits are usually made from the annual software subscriptions and any upsells that may follow, since the incremental costs are low. The company claims that its gross margin will increase by 60% over the life of the system. The company’s profitability could be at risk if it cannot grow its relationship with customers or achieve a sufficient scale.

I also think that the company’s customer concentration is a concern, since it relies on a small number of high-paying clients (mostly Walmart and Albertsons). Its high prices also drive away smaller customers, reducing its market.

Costly Valuation

Symbotic is now a very expensive company in my opinion, after the 250% increase in its share price in this year. The current EV/sales is 25.6x. This is significantly higher than the other warehouse automation companies such as Zebra Technologies and Berkshire Grey. As the company has not yet achieved profitability, I use EV/sales.

The chart below shows that the average EV/sales for the two companies is 3.8x. This represents an 85% discount compared to Symbotic. Although the company’s revenue is growing much faster, most of that optimism has likely been priced in. I don’t see much upside potential, unless the company can accelerate its growth. This seems unlikely.

Investor Takeaway

Symbotic, a good company at a bad cost. The company’s warehouse automation system is a competitive advantage and offers a great value proposition. The company should also be able to benefit from the rapid growth of the market, given the increasing popularity of ecommerce and omnichannel retail. Profitability and customer concentration remain major concerns. Its valuation is extremely high, which will limit its potential upside in the short term. The current risk to reward ratio is not particularly attractive, so I rate this company as a Hold.