Are you afraid of a dystopian future in which robots overtake humans? Well, CloudMinds probably won't make you feel any better. CloudMinds is a Beijing-based company that wants to give robots a "cloud brain" and a "nerve network" to make them smarter and capable of working together.

To help fund the next leg of its growth plan, CloudMinds is looking to raise $500 million in an initial public offering this year. Should investors pay attention to this upcoming IPO?

A cartoon robot in a business suit and tie

Image source: Getty Images.

Massive opportunity for robotics

Robots are coming. Society already uses them to sweep floors, manufacture cars, and record aerial videos, but you should expect them to play a bigger part of our lives in all sorts of fields. Currently, robots are singularly designed to operate in narrow use cases and perform simple tasks. However, more sophisticated robots capable of performing a variety of functions may soon be connected to the internet and will need to be managed with sophisticated software to get the most out of them.

CloudMinds has built a cloud system which enables humans to manage a fleet of robots and provides them a secure network to communicate. The company refers to the two critical components of its system as the "cloud brain" and the "nerve network." The cloud brain is a software layer that controls all aspects of a robot's function including its vision, voice detection, and movement. The nerve network is a layer of secure communication that allows the cloud brain to communicate with the robot's hardware.

Company graphic showing CloudMinds' software and hardware products

Image source: CloudMinds.

The company makes money by selling robots equipped to run its cloud robotics system. CloudMinds will also modify third-party robots to run its software. The illustration above shows the operations hierarchy for the company's cloud software and some of the robot categories running on the CloudMinds system.

For example, the XR-1 is an all-purpose robot capable of precise tasks such as threading needles, opening doors, folding clothes, and playing card games. Also shown in the graphic is Softbank's (SFTBF -0.43%) (SFTB.Y 0.74%) Pepper robot -- Softbank is CloudMinds' largest investor. The Pepper robot has been used to greet guests in stores and restaurants in Japan, and Softbank is now selling Pepper at its mobile-phone stores in Japan, for people to use for entertainment at home.

In short, CloudMinds is powering the robot revolution primarily through its sophisticated software, but it's also partnering with hardware companies to deliver robots capable of advanced functions.

CloudMinds' financial picture

CloudMinds doesn't have much to show when it comes to financial metrics. Last year, the company generated $121.7 million in revenue and produced an operating loss of $72.4 million. While this was more than five times the prior year's revenue, it's not clear what the growth trajectory is for the business. In the first quarter of 2019, revenue actually fell due to the timing of certain customer purchases.

Metric 2017 2018 Q1 2018 Q1 2019
Total revenue $19.0 million $121.7 million $32.7 million $12.3 million
Gross profit $0.2 million $6.4 million $0.4 million $1.2 million
Gross margin 0% 5.3% 1.2% 9.7%
Operating loss ($39.4 million) ($72.4 million) ($11.8 million) ($9.7 million)

Data source: CloudMinds financial reports.

More concerning is the low gross profit margin. Gross profit margins generally describe how profitable a business's products are before taking corporate overhead into consideration. If CloudMinds cannot increase its gross profit margin, then it will need to have significantly greater scale to generate a net profit on the bottom line. Perhaps the company's profit margins are not reflective of the long-term potential because of how early-stage its products are.

Finally, virtually all of the company's business today is in China. For a U.S.-based investor, this has several implications including exposure to foreign currency exchange risk. However, the Chinese domicile could be interesting to investors who'd like to diversify their geographic exposure.

Is CloudMinds worth investing in?

At this stage, there are a lot of blanks to fill in about the CloudMinds IPO. Although it's rumored the company is seeking $500 million in the offering, it's not clear what the valuation will ultimately be.

CloudMinds does represent an interesting long-term play on robotics software and the Internet of Things, but the company is still early-stage and is quite unprofitable.

More generally, Chinese stocks, including Chinese technology stocks, have not performed well lately. This partly reflects a slowing macroeconomic situation in China, but it also bakes in the geopolitical risks from the trade war between China and the U.S. Although CloudMinds wouldn't be directly impacted by the trade war, its stock could be collateral damage if tensions continue to escalate.

Overall, the CloudMinds IPO strikes me as having a lot of risks and no immediate call to action to invest. The company could certainly be a long-term winner, but there will be plenty of time to assess the situation and invest later if it shows strong progress in its growth plan.