As the global economy evolves, investors are always on the lookout for innovative companies that can offer high returns. One such company that's lately been generating a lot of buzz is Symbotic (SYM 1.62%), a cutting-edge robotics and automation company that's taking the logistics industry by storm. Its advanced technology and proven track record of success have caught the attention of Wall Street, and its stock is quickly becoming a hot commodity among savvy investors looking to capitalize on the latest trends in the market. In this article, we'll examine why Symbotic is such an attractive investment opportunity and explore some key factors that make it a smart choice for anyone looking to grow their portfolio.
The future of logistics is here
Despite the rise of Artificial Intelligence (AI) and robotics, many retailers still rely on manual and semi-mechanized systems for warehouse and distribution centers. Symbotic stands out by offering cutting-edge technology for automating warehouses, a highly attractive solution for brick-and-mortar retailers seeking to expedite operations, reduce labor costs, improve inventory accuracy, and increase efficiency.
Symbotic's system handles everything involved in warehouse logistics, from receiving the goods from a producer's transport vehicle to preparing the goods for delivery to a store, pick-up location, or person. It uses AI to control a team of robots that can store and retrieve and handle many different types and sizes of products. The robots work together and talk to the software using a wireless network.
Although retailer demand is high for warehouse automation technology, it is hard to find many companies offering end-to-end warehouse automation solutions. The few companies that provide such solutions have mechanically complex systems that can be expensive to implement and adapt to a retailer's changing needs. Furthermore, these competing systems require a significant amount of manual labor and take up more space in the warehouse when compared to Symbotic's solution.
Other solutions like Amazon's (AMZN 3.43%) Kiva, Exotec, Ocado (OCDD.Y -2.26%), and AutoStore focus primarily on individual order fulfillment. They don't directly compete with Symbotic's goal of fulfilling physical store orders. The above systems mainly target e-commerce and lack the technology to support large retailers with online and offline operations. Therefore, Symbotic has a lot less direct competition than many assume.
As of the end of 2022, management believed there was a $373 billion market for warehouse automation for large retailers in the U.S., Canada, and Europe, and it has only tapped into a little over 0.25% of that market, presenting an excellent opportunity for growth. And so far, the company has been taking advantage of the opportunity. On July 31, 2023, it reported growing third-quarter fiscal 2023 revenue by 78% year over year to $312 million, handily beating analysts' estimates of $262.68 million. Plus, it had a backlog at the end of the third quarter of approximately $12 billion, indicating the strong demand for the company's products and services.
There are some concerns
However, Symbotic is facing some challenges that could impact its growth. For instance, the company's margins are lower than you would like to see. Its gross margin in the last quarter was 16.97%, while its operating margin was negative at 13.47%. Yikes! A company struggling with low margins must either improve cost management, pricing strategy, sales performance, or operational effectiveness or eventually face financial difficulties, lose market share, or go out of business.
Another risk factor for Symbotic is its revenue model. The company heavily relies on one-time sales of its warehouse automation systems, with only 3% of its revenue coming from recurring sources. A low recurring revenue is a big issue because it makes it harder to estimate the company's future results. Thus, it reduces the company's attractiveness to investors and analysts who value companies based on future cash flow and earnings potential.
Finally, one customer, Walmart (WMT -0.08%), makes up most of its backlog. This customer concentration means that if Walmart cancels its contract, Symbotic could experience a significant decline in revenue. These are all concerns to consider when evaluating the company's potential for future growth.
Reasons it should be on your buy list
The company is still new and needs to grow its operations, so its profits are nonexistent. However, if it improves profitability over time, it will remain an investment opportunity to consider. Compared to the previous quarter's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss rate of 4% and the loss rate of 12% from last year, the company improved its operating leverage by achieving a 1% loss rate in its recently reported third quarter. When a company improves its operating leverage, it means that the company can generate more profits from a given level of sales. In other words, it is becoming more profitable. The company attributes its increased profitability to faster revenue and gross profit growth compared to its operating expense growth, as seen in the below chart.
SYM Revenue (Quarterly YOY Growth) data by YCharts.
On July 24, 2023, Symbotic and SoftBank (SFTBF -0.02%) formed GreenBox Systems, a joint venture (JV) to enter the warehouse-as-a-service market, bringing warehouse automation to small- and medium-sized businesses that will add $500 billion to Symbotic's addressable market. The company can capture value from the JV in several ways, the most important being that it can gain significant recurring revenue streams over time.
Image source: Symbotic.
The GreenBox business addresses some concerns about Symbotic, making the company far more attractive to investors. Additionally, its stock sells at a price-to-sales ratio of 2.48, undervaluing its growth potential. If you want a tremendous long-term growth opportunity supported by an excellent secular growth trend, consider adding the stock to your portfolio.
