Another SPAC Worth Watching

In this episode of Industry Focus: Tech, we get on the SPAC train with a rundown of Berkshire Grey, an automation and software company being acquired by Revolution Acceleration Acquisition Corp (RAAC). We break down the huge growth story Berkshire Grey is presenting to investors and the impressive pedigrees from company management and Revolution's investing team.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on March 19, 2021.

Dylan Lewis: It's Friday, March 19, and we're chatting SPACS. I'm your host, Dylan Lewis. I'm joined by Fool.com's supreme speculation specialist of specific stakes in SPAC structures, Brian Feroldi. Brian, how are you doing?

Brian Feroldi: Dylan, happy Friday to you. Happy St. Patty's Day week to you. Happy NCAA college basketball to you.

Lewis: Brian, happy SPAC day to you. [laughs] There's so much going on, and it's fun. There's some great energy. I think if there was a four-letter acronym to capture the market in the last year, it's probably SPAC. I think it's probably the easiest way to do it.

Feroldi: There's been an explosion of SPACs over the last six months. It seems like every time I turn around, there's another SPAC that we have to check out and learn about. Today's SPAC was sent to me by a Twitter message by a follower named [...]. He put this on my radar. He said, "Hey, this looks interesting. Check it out." I checked it out, saw a couple of big-name investors that I am familiar with, sent it on to you, here we are talking about it. So, thank you for the suggestion.

Lewis: The wisdom of the crowds and the strength of the community. We talk about it all the time when it comes to relaxing a little bit when things are getting crazy in the markets, but it's also a great source of ideas for us.

Feroldi: It really is, and there's a lot to be excited about. This name, as I said, has some big-name backers, including the recent king of SPACS, Chamath Palihapitiya. His name is all over this thing so that right there is a good start.

Lewis: Yeah. You're going to have to follow a couple of different names as we run through this discussion, listeners. There is Revolution Acceleration Acquisition Corp, which is currently listed on the Nasdaq, RAAC, and they are acquiring the company that we're going to be kicking the tires on for today's show, and that's Berkshire Grey. Brian, to our knowledge, no relation.

Feroldi: To our knowledge, Dylan, [laughs] no relation to Warren Buffett's monstrous company Berkshire Hathaway. Yes, this company, the SPAC has already been announced of its target. The estimated close is sometime in the second quarter of this year. You can invest in this company today by buying shares of Revolution Acceleration Acquisition Corp, RAAC. We didn't see what the ticker is going to be, although I think it's going to be BG, but we'll just have to find that out once the SPAC is finalized.

Lewis: Yeah. A lot of details still to come on this one. But yes, to your point, if you're interested after listening to this one, you can get shares. It's not like one of those prospective shows where the shares have not yet hit the public markets. Because of the SPAC approach, they're already out there, even though the deal hasn't quite closed yet. There are some big, big names behind this one. In a lot of different ways, I think the leadership team is incredibly tenured in the space they're focusing on, which is automation and robotics. But the backers, financially on the deal, also some really big names.

Feroldi: Yeah. When you see a SPAC, you definitely want to see that other big-name investors are in it and they're going to be continuing to continue their investments post SPAC. That's what we're seeing here. Some names that listeners might know, Khosla Ventures, they are an investor here. SoftBank Group, they are an investor here. As I said, Chamath's company, Social Capital, they're an investor here. What really flew off the page to me when I was quickly reading through this company's presentation was one of the co-founders of the SPAC Revolution Acceleration is Steve Case. That name sounds familiar. He's the co-founder of a little outfit called AOL.

Lewis: Yeah. He is someone that, if you've been following the internet at all over the past couple of decades, you've likely come into. He's a really interesting guy. I've seen him personally at South by Southwest speak. He always has plenty of interesting things to say about things online and the nature of where investment is going with the internet. The more I spent with this company, the more I understood why they're putting some money into this business. There are a lot of tailwinds here, and while it sounds like more of a manufacturing and machinery-oriented business, one that dovetails very nicely with e-commerce.

Feroldi: Yeah, and then you wouldn't know that from the name of the company, would you? Berkshire Grey, they could be selling anything, but what the company is really focused on is robotics in warehouses. Right from their slide deck they say, "We help retail, e-commerce, grocery, package-handling companies to transform so that they can compete, grow, and win in the modern economy." This is a company that is focused on robotics in warehouses. If that sounds familiar, that's something that Amazon (AMZN 0.56%) has been doing for about a decade now. Amazon acquired a company called Kiva Systems over 10 years ago, and they have been pouring billions into their own robotic capabilities. Berkshire Grey really helps essentially everybody not named Amazon to compete.

Lewis: Yeah. I was looking through the slides on their presentation and they made the point pretty clearly. They're like, "Amazon is setting the standard for warehouse operations and consumer expectations. If you're not matching it, you are falling behind." That's basically the thesis, is that you have this industry titan who is heavily invested here, and I think in a matter of five or 10 years, totally transform what people expect from e-commerce companies, logistics companies, how quickly they get their packages, all of these things. It becomes something that goes from a competitive advantage, Brian, to basically table stakes for the industry.

Brian Feroldi: Yeah. Right now, the industry, again, everybody not named Amazon is woefully far behind on the robotics front. Berkshire Grey points out that over 90% of current e-commerce orders are fulfilled manually, and only 5% of warehouses have any automation in them. That's a big problem because not only have we seen explosive demand for e-commerce growth, which necessitates huge growth in warehouses, but most of that growth is done through manual operations. That provides labor challenges when you are introducing labor to the picture. It's much more expensive and that's harder to scale too. Berkshire Grey helps companies to solve many of those challenges head-on.

Lewis: What we're really looking at here is this comprehensive and coordinated AI-based robotics approach to your supply chain. That is the core offering that they are giving to their customers. They position themselves as a pure-play robotics business. They say they are software-enabled. We're having a little bit of a hard time, Brian, digging into exactly what the revenue base looks like for them and where the money is coming from right now. We'll get into the financials a little bit. But it is one of those businesses that there's a hardware element, there's a software element. Down the road, you could see the software element becoming very attractive, particularly with the gross margins.

Brian Feroldi: Yes. The company has invested in its own proprietary technology to handle all facets of the warehouse fulfillment. They are building their own robots, they have their own sensing systems, they have their own gripping systems, their own machine vision systems. All of that is going to be worked together seamlessly with their software, which is powered by AI, and as they say, also links directly with companies existing technology stacks. That is the software package that they have put together. What's interesting, too, is this company was founded in 2013 and was basically in stealth mode for over five years, just building the technology behind the scenes. They've built up a group of over 300 patents, and they really made a push into the consumer space or to actually get their product out there just a few years ago. As we'll talk about in a little bit, they've made some significant progress already.

Lewis: They have, and they have a deep IP library, over 300 patent filings protecting what they are doing and what they're offering. The core offering for them is basically this fully integrated solution. They are offering the hardware; they are offering the software. I think while it is something that probably takes a little bit longer to install than some of the other systems that are currently out there, it is meant to work together much more cleanly than probably some of the more simply software-based solutions that are out there, Brian.

Brian Feroldi: Yeah. They do have some data out there that shows that working with them is a good deal. They basically point out that one of their Berkshire Grey systems, when implemented, will replace eight manual pickers and hundreds of case handlers. It's also designed to be highly scalable so it can be rolled out across your network. Using them increases efficiency, increases speed, increases accuracy, greatly reduces your labor cost. They say that the typical payback period for a customer is to get all of their return on investment back in two or three years. They don't provide hard numbers to back that up, but given the cost savings of it, I could see that being accurate.

Lewis: Yeah. I think that makes a lot of sense to me. If you're listening to us describe this new sale, it sounds like an expensive thing to install. You're right to some extent. I mean, this is the type of solution that only works for businesses of a certain scale. You look at the customers that they highlight so far, Walmart, Target, FedEx, TJX, I think that does a good job, Brian, of showing the industries that make a ton of sense for this type of service, but also the budgets that you tend to be working with when you're looking at this part of the market.

Brian Feroldi: That is a huge credibility boost to my mind, to say that this company that's only been selling for a few years, and they've already landed Walmart, Target, and FedEx as customers. This strategy reminds me very much of Palantir. Palantir was in the shadows for a while, they spent all this time on security and they landed the U.S. government, and they used that to anchor customers to sell the rest of the industry. As we've seen, that's a successful strategy. I really like that they have already nailed down Target, Walmart, and FedEx as customers. That will likely be a halo effect that accelerates this company's growth in the years ahead.

Lewis: Yeah. I think if you couldn't be embedded with Amazon in this world, Walmart is probably the next best one. What we're looking at here is a very challenging problem with the sheer number of products that a lot of these retailers have. The SKU counts are wild, the expectations on when things are actually fulfilled are incredibly aggressive on the consumer side. If you can operate on their scale, it makes sense, it's going to make sense down the road for other retailers as well. That sampling of customers we looked at, Brian, very retail heavy, some logistics in there with FedEx, a couple of other categories they identify on their roadmap, grocery and parcels as well. A lot of them are facing similar challenges to what you see within e-commerce and retail.

Brian Feroldi: For sure. One other thing that's nice to note about those customers is when you look at just Walmart alone, it has thousands of stores around the globe, not to mention the warehouse. It has an incredibly complicated supply chain. If Berkshire Grey can get their foot in the door with them, prove some early success, that is a customer that they can grow with for decades to come. That is a really big positive.

Lewis: In terms of what the books look like now, Brian, we've put out some big customer names. The revenue number might be a little surprising to people, $35 million in revenue in 2020. A huge chunk of what the story is really, for this business, is what it will become, not really what it is right now.

Brian Feroldi: That's not too surprising, again, this company was in stealth mode for five years and only really started to take on customers about two years ago, so getting to $35 million in revenue is not that surprising. Plus, which customers do they land now, again, Walmart, Target, FedEx. Can you imagine how challenging it must have been to get those customers to sign on the dotted line, to give Berkshire Grey a try? That must have taken a year or more. Having $35 million in revenue last year is actually a pretty impressive number given the early strategy. The tricky thing there is we don't know the exact breakdown of that number, we don't know how much was hardware sales, we don't know how much was software sales. We do know that the gross margin, not that impressive, is about 8% so far. This is a company that if you're going to buy today, it's not because of what they've done, it's because of what they say they're going to do.

Lewis: Yeah. A huge part of it is going to be continuing to grow with these anchor customers that they've identified and they find to be very important. But really scaling, enjoying operating leverage, adding new customers, and building onto what they already have. Robotics-as-a-Service is a really big part of that value-add service is something they identify further out. But this is a recurring theme that we see with SPACs, Brian, just the nature of SPACs and what that process allows businesses to do. A lot of the story here is forward-looking and the numbers that this business is throwing out when you get to 2023, 2024, 2025, they get big fast. There are some ambitious goals here for this business.

Brian Feroldi: This is a company that is on record saying, "We essentially expect to double our top line every year. They're calling for a 99% compound annual growth rate over the next five years. They do have some of that already booked. The company did note that it has taken in $114 million in orders to date and their visibility pipeline that they see over the next couple of years is at $1.7 billion. But make no mistake, this is a company that is expected to grow its top line tremendously over the next five years. While they're doing that, they have given us some gross margin guidance. They are at 8% gross margin today; they do say within the next five years, as their product mix shifts, they expect to grow that number to 48%. That's going to be tremendous growth if they can achieve that. But this isn't software-like margins that we're used to seeing from Software-as-a-Service businesses.

Lewis: Yeah. I feel like in the early days, with a lot of Software-as-a-Service businesses, even on a relatively low revenue basis, you start to see the margin profile emerge. In this case, operating leverage and scale are going to be a huge part of whether or not that happens. They are looking out at 2025 and saying, "We think we could have $920 million in revenue by that year." That gross margin of getting up into the 40% range, it's going to be on a very large revenue base, if the story holds, a lot of things are going to have to go right for that to happen. But I think the core thing that I want to emphasize here for folks that are potentially interested in this business is, what you are buying today in terms of a financial model looks totally different than what the business expects to be in four years.

Brian Feroldi: For sure. Given that a significant portion of their story is going to be the proprietary hardware, it's not all that surprising to see a gross margin that's relatively constrained. It wouldn't surprise me too, if this company had some consultant or service business down the road where customers pay them to implement their products into their warehousing. If so, we've seen lots of companies do that at a very low margin just to essentially win over the business. But either way, if they can grow at the revenue they say they're going to grow at, and expand their margin, there's plenty of gross profit for this company to become profitable, at least on an adjusted EBITDA basis. They are saying that by 2024, they expect to post positive adjusted EBITDA. Not a metric I like, but it is a metric nonetheless. We do know that post IPO, the company is going to have over half $1 billion in cash on its books and no debt. They believe that their cash balance after the IPO or after this fact goes through, is going to be enough to get the company to cash flow profitability by 2024.

Lewis: Yeah. I think to backtrack some of my skepticism, Brian, I think that it's a nature of looking at these types of businesses in general. Right? The future story is always going to be what you are truly buying when you're buying shares. This is a business that looks like it has a decent amount of optionality between getting installed with major players in the retail space operating on a massive scale. One, credibility like we talked about, but two, it helps you identify problems that a lot of other businesses are going to have. Once you're installed there as a supplier or software solution, it becomes really easy to roll those into what you are offering existing customers. I think there's a lot there to like and maybe that's going to be part of what we see with margin expansion as well. But it's going to materialize.

Feroldi: They do see that and I could also see if you have this kind of system installed on a few of your warehouses, if it does indeed work out with Walmart and there's installed everywhere. Can you help imagine how painful it beat to switch to another provider? It's very early on now but I could see if this company if this thesis works out for a couple of years the switching costs could be enormous.

Lewis: It will surprise no one but throwing out some big revenue numbers, we have some very large total addressable market and market potential numbers as well, Brian.

Feroldi: The company points out that e-commerce sales in the United States alone last year were $860 billion. A lot of that was obviously COVID-related and saw a huge step forward. This company doesn't see that TAM as that big, but it's in that ballpark, Dylan. Management believes that its current addressable market opportunity exceeds $2.8 billion. As a reminder, their current backlog of products, their current pipeline for products is about $1.7 billion. If this thesis doesn't work out, it's not because the opportunity isn't there.

Lewis: I think anyone listening would say, "Yeah, I understand why people are interested in this business." Right? Just in your head, count the number of things you've ordered online over the last two months, right? Think about all the work that goes into making that happen. Any cost savings and any efficiency gains that you can have on any of those individually then scaled over to much larger operations. The story really makes sense that TAM $280 billion totally makes sense. There's a lot there. I think that for them it's going to be what can they roll in to expand margins? I'm really curious about robotics as a service side of the business. I think that that's where the story gets much more compelling for me and I have to say, looking at the management team here, Brian, I feel like the vision is probably in pretty good hands.

Feroldi: As you pointed it out right now, the management team that we do know is focused on the spark. Which is again co-founded by Steve Case, the co-founder of AOL, as well as Jon Delaney. He is also an accomplished executive himself. He founded two companies that came public and were acquired before he was 40 years old. That's a heck of a pedigree behind him. Let's talk about Berkshire Grey management team for a second there. Again, a lot to like here. The founder is, and the current CEO is a guy named Tom Wagner. He spent years at another successful business called iRobot as the CTO. He also has a background at Darpa and Honeywell. The president and CEO is the former CEO of a company called Intellects, which was a software company that was sold for three quarters of $1 billion. The Chief Scientist, was the director of robotics at Carnegie Mellon, that is a top-tier school known for robotics. Then the company's board is very impressive. You have people there that are going to be from the venture capitalist firms that are going to be partners with them. Softbank, Khosla Ventures, as well as former executives at Amazon. Management team here is really top-notch.

Lewis: One of the things that I think is neat Brian, about the Spark approach and revolution being in the mix as we get their thesis laid out in presentation format for us. It's one of the slides, so they basically just breakdown like, here's why we're investing in this business. I won't go through the entire thing, but just a high level stuff. They say, OK, one, company as a category creator. Two, it's gotten industry-leading technology, it's hard for you and I discussed that out, but we're taking management at face value and just look at pedigree and say like it looks pretty good. Three, huge market opportunity with trends accelerating, particularly due to the pandemic, strong growth story backed by sizable anchored for spend from their blue-chip customers. All of those huge social proof points they have from the existing contracts in place. Asset-light business model with potential recurring revenue streams. Think that's one of those things Brian needs to see materialized over time. We don't have a good lens into that right now. Then innovation is key to the success of e-commerce and logistics because of companies like Amazon, it's a must-have, it's mission-critical for a lot of these businesses. Then finally, you said that in strong leadership, solid existing customers, and a good board. That's what Steve Case and team see with this business. I tend to agree with a lot of their assessments there. I think there's a lot to like.

Feroldi: I mean, if you were to just back up and just say what the central core thesis here that you laid out at shortcut could be, Amazon is doing robotics, everybody else has to do robotics. That is a thesis I buy, I mean it is just as simple as that. Ten years ago when AnaBot kept a system which if memory serves was for under $1 billion, I think that was a brilliant move. At the time, Kiva was the leader, and Amazon has essentially had a monopoly on that technology for itself. It makes complete sense to me that there has to be a number two provider for everybody else to use. Berkshire Grey, I think if they can prove that they are that company, I think the potential here is just massive.

Lewis: Brian, I think when we tend to talk about the best acquisitions of all-time, particularly in the tech space. The easy ones that come to mind, Instagram and probably YouTube. Just in terms of what they have blossomed into under their parent company. I think Kiva is probably a sleeper in that conversation.

Feroldi: I really think it is too. Financially, it's really hard to quantify what has that done for Amazon but long term, strategically, as I said, they now have 200,000 Kiva Robots that are deployed across their system. That is going to allow Amazon to lower its fulfillment costs faster than everybody else. Strategically, I think that's going to be proved to be a brilliant acquisition.

Lewis: You mentioned that Berkshire Grey, in terms of thesis, is if worst case, maybe second-best in the space and that for everyone that's not Amazon, they become a customer. There are other players investing in the space. I think in part just because the numbers we've talked about, they get big fast and the cost savings are there for your customers. There are a lot of players here and Berkshire Grey is going to have to prove that it's worth putting money with them instead of a lot of these other players.

Feroldi: The company calls out lots of direct competitors including Hexagon, Rockwell Automation, Ocado Group, Mitek, and Trimble. These are not small businesses. I mean, Rockwell Automation, for example, has $6 billion in trailing sales, is a $30 billion company. On the machine vision side, there's also companies like Cognex or how but even the fact that Shopify has been investing aggressively in its own fulfillment capabilities for its customers. There is plenty of competition that this company is going to be squaring off against. I think that the fact that they have already signed up Walmart, Target, and their bench really gives them an edge, but that will be something that they have to prove over time.

Lewis: What we've seen so far is about a $2.7 billion valuation for the taken public version of this business. That's a fraction of the size of some of the competitors that we just talked about. It's a 10th of the size of Rockwell. There is a different scale that some of those companies are operating on.

Feroldi: For sure, and when you compare that $2.7 billion valuation to last year's revenue of $35 million, boy is that a healthy price to sales ratio. If you're investing in the business today, you really have to believe that management is going to do what they say they're going to do.

Lewis: I'm curious, Brian. This looks a lot different than a lot of the companies that we talked about on the show regularly. Where does it sit for you right now in terms of investable ideas?

Feroldi: I think that there's a lot to like about this business. I think the category is a no-brainer for growth. I like the management team here. I like the fact that they're shifting to Robotics-as-a-Service offering. I could see that being a big deal. I really like that they have nailed down a number of large customers already and that they're starting to deploy them. I think the company also has lots of revenue visibility to it. This does check many of the boxes that I look for in a good investment. However, given the stage of the company is in right now, I think that this is more of a radar stock right now and something that you should watch, and really see how it performs on the public markets for a little bit. This is a company that if the thesis truly works and you can buy it at when it's at a $10 billion valuation. If the thesis works, you're still going to make a heck of a return from there. If it doesn't work, it's going to fall drastically from here. This is a stock that I will put on my radar and will watch, but I will not be a buyer today. How about you?

Lewis: I think I'm looking at it the same way. We talked about it with companies that have gone on a big run. When you own a stock and you've maybe bought it once and you're looking at it again, you have to make that second buy. You're trading the price that you're paying for certainty in the investments that you're making. I think this is a business where I would rather have a little bit more certainty in where it's going before I start putting money into it. The things I will be watching are, do we see them hitting their growth targets for revenue? Because they're ambitious and that's a big part of where they say they're going. Then do we start to see margin expansion over time? Because I look at single-digit gross margins and I say, there's just a lot of other places to put money that it's easier to see a high-gross margin future than this business right now.

Feroldi: Totally. But if somebody came to me and said, I want to invest in this company today, I think it has 10X plus potential. Boy, would I agree with them? I mean, there's nothing wrong if you want to take a swing for the fences and buy the stock today and really see if it can prove itself out. As I said, there's a lot to like about this business even today.

Lewis: Yeah, you don't have to look hard. Just look over to its competitors. That's a 10X right there if they're able to match the size of a company like Rockwell at some point. I think to some extent, Brian, where it gets a little bit into risk appetite and knowing yourself as an investor. It's OK to sit on the sidelines for something that's high-growth and really interesting, but maybe a little bit more anxiety-inducing that you want to have in your portfolio.

Feroldi: Totally. It depends on what type of investor you are and what you were looking for. But if you're looking for a swing to the fences, this isn't a bad idea.

Lewis: Just generally speaking, the world of specs, probably a good space to be looking at that your investment style, right?

Feroldi: So many choices to choose from, and a lot of them are promising enormous growth at "decent valuation" today. How many of them actually fulfill that? Only time will tell.

Lewis: Yeah, and listeners, if you enjoy this one, and you haven't caught some of the recent episodes that Matt Frankel and Jason Moser have been doing on specs, highly suggest you checkout their Monday episodes and they're doing a four-part series. You can head over to podcasts.fool.com and catch those, or you can get us on iTunes, Spotify, wherever you get your shows. But Brian, we will not be beholden into specs. We will talk about other companies as well as they are interesting.

Feroldi: Dylan, we'll always talk about awesome businesses. I don't care if it's an S1. I don't care if it's a company that has been in the market for 10 years or spec. If it's great, we want to talk about it.

Lewis: Exactly, and I love doing it with you. Thank you so much for joining us on today's show.

Feroldi: You too, Dylan.

Lewis: Listeners, that's going to do it for this episode of Industry Focus. If you have any questions, or you just want to reach out and say "Hey," just email us over at [email protected] or you can tweet us @MFIndustryFocus. As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear. Thanks to Tim Sparks for his work behind glass today, and thank you for listening. Until next time, Fool on!