Symbotic (SYM 0.17%) stock has been on fire in 2023, riding the coattails of recent advances in artificial intelligence (AI). Share prices of the warehouse and supply chain automation specialist are up 367% so far this year, more than 19 times the increase of the S&P 500. This is far better than its performance last year. After its debut on the public markets via a reverse merger with a special purpose acquisition company (SPAC) in June 2022, the stock sank, closing out last year down by 40%.
Symbotic's rally in 2023 has been fueled by the robust adoption of its services and strong financial results, as well as its deep ties to AI. It reported record sales and accelerating deployment, and some investors are betting there could be further gains ahead.
However, investors who missed out on the stock's blistering rally are left with a quandary: With such a run-up in the rear-view mirror, is it simply too late to jump in, or can investors who buy now hope for further strong gains?
Image source: Getty Images.
The warehouse of the future
Imagine you're a warehouse operator struggling to maximize the amount of inventory you can squeeze into a single warehouse. You have to consider not only the shelf space necessary for the inventory itself but also the weight disbursal to ensure the heaviest items are near the bottom and those most susceptible to being crushed near the top. You need to ensure that you have sufficient room to access and move your inventory, while also considering the maneuverability of the forklifts or robots used to transport products. Most difficult of all, these considerations change with each and every new shipment and delivery.
That's where Symbotic comes in. The company has developed an AI-controlled system that solves all these problems. Its proprietary software coordinates the entire warehouse operation while a cadre of fully autonomous robots scamper about doing its bidding. The unique system architecture and modular design can be retrofitted into an existing space or integrated into a structure built from the ground up. Not only does the system optimize the amount of storage space available, but it can also take items from existing inventory and design and create custom mixed pallets for shipment to merchants.
Symbotic's novel solution is creating strong demand and attracting attention from some of the world's largest retailers, including such household names as Walmart (WMT 0.13%), Target, Albertsons, and C&S Wholesale Grocers. In fact, Walmart was so impressed it bought an 11% stake in the company. The retail giant also penned an agreement to outfit all 42 of its regional distribution centers with Symbotic's warehouse management system.
For its fiscal 2023 fourth quarter, which ended Sept. 30, Symbotic generated revenue of $392 million, up 61% year over year. While it has yet to generate a profit on a GAAP (generally accepted accounting principles) basis, Symbotic has generated positive operating cash flows in each of the past four quarters and for its fiscal 2023. This suggests that its losses are the result of non-cash items, including depreciation, and that sustained profitability is on the horizon.
Image source: Symbotic.
What the future holds
Retailers -- particularly grocery stores and discount retailers -- historically operate on thin margins and are always looking for any advantage they can get. Furthermore, there's a paradigm shift going on in the industry as merchants shift from brick-and-mortar or e-commerce to more omnichannel strategies.
One of the biggest incentives for retailers to use Symbotic's system is the cost savings it can provide. By automating warehouse systems, clients reduce their labor costs, lower transportation and operating expenses, and increase efficiency. Case studies suggest that the system can pay for itself in as little as five years, and could save retailers hundreds of millions of dollars over the useful life of the system.
The company was originally focused on two categories in the domestic market -- general merchandise, and food and grocery -- but it's expanding beyond those niches. Symbotic has plans to move into supporting retailers in consumer-packaged goods, apparel, auto parts, and home improvement, as well as third-party logistics providers. And it plans to push into international markets as well. All of this will boost its total market opportunity from $144 billion to $432 billion.
How to approach Symbotic now
Symbotic hasn't attracted a lot of attention from Wall Street thus far. However, of the 14 analysts who had offered an opinion as of November, 10 rated it a buy or strong buy, and none recommended selling.
Investors who fear they have missed the boat take heart. Symbotic stock is selling for just 3 times trailing-12-month sales and 1.8 times forward sales, which makes it a relative bargain for an AI stock.
Buying shares in Symbotic might seem like a no-brainer at first glance, but there is an asterisk for investors to consider. It has a high degree of customer concentration, with one customer accounting for 87% of its revenue. While recent regulatory filings are mum as to the identity of this client, a prospectus from late last year described Walmart as Symbotic's largest customer. Relying so heavily on any one customer is risky, but that concentration should decrease as Symbotic adds new customers.
Investors comfortable with accepting a little extra risk in exchange for greater potential rewards should consider taking a stake in Symbotic to ride the wave of AI and warehouse automation.
