Symbotic (SYM 1.62%) attracted a lot of attention when it went public by merging with a special purpose acquisition company (SPAC) on June 8, 2022. The warehouse automation company's shares started trading at $10.54, rallied over the following year, and closed at a record high of $63.54 on July 31, 2023.
The bull case for Symbotic was easy to understand. Its autonomous robots processed pallets and cases more efficiently than human workers, and it claimed that a $50 million investment in just one of its modules (which bundle together its robots and software) could generate $250 million in lifetime savings over 25 years.
Image source: Getty Images.
Symbotic was also backed by the Japanese conglomerate SoftBank (SFTB.Y 1.75%), which owned the SPAC it merged with, and Walmart (WMT -0.08%), which took an 11% stake in the company. From fiscal 2021 to fiscal 2023 (which ended last September), the company's revenue rose at a stunning compound annual growth rate (CAGR) of 116% -- and analysts expect it to continue growing at a CAGR of 44% from fiscal 2023 to fiscal 2026.
Symbotic's stock has pulled back to about $40 as of this writing, but it's still notched a gain of roughly 280% in less than two years. It might still have room to run, but investors should keep these three things in mind before joining the bulls.
1. Walmart is its biggest customer
In fiscal 2023, Symbotic generated 88% of its revenue from its Master Automation Agreement (MAA) with Walmart. That deal will last until 2034 and aims to automate all 42 of Walmart's U.S. regional distribution centers.
Walmart's stake in Symbotic also gives it a lot of power over the company's decisions. Walmart can designate one of its senior employees to attend all of Symbotic's board meetings in a nonvoting capacity, while Symbotic is obligated to notify Walmart if it explores any deals that impact more than 25% of its total voting power. Walmart's partnership also bars Symbotic from ever providing its services to an unnamed "specified company" -- which sounds a lot like its top competitor, Amazon.
Symbotic serves other customers, like Target, Albertsons, and C&S Wholesale, but its overwhelming dependence on Walmart can't be ignored. If it doesn't meaningfully expand its customer base beyond Walmart before it finishes automating all its domestic warehouses, its sales growth will abruptly stall out.
2. It just "created" its other major customer
Last year, Symbotic formed a warehouse-as-a-service joint venture with SoftBank called GreenBox. Symbotic owns 35% of GreenBox, while SoftBank's subsidiary owns the remaining 65%. GreenBox will exclusively purchase its systems from Symbotic through a $7.5 billion contract that started in fiscal 2024 and will last six years.
Symbotic believes GreenBox's modules could generate more than $500 million in annual recurring revenue once fully installed. That would be equivalent to about 14% of its projected revenue for fiscal 2026.
That sounds like a promising step toward diversifying its top line away from Walmart, but Symbotic is still relying on SoftBank -- its other top investor -- to accomplish that. Symbotic's own exposure to GreenBox as an investment could also backfire if the joint venture fails to carve a meaningful niche with its automated warehouse services.
3. Its dual-class shares inflate its valuation
At first glance, Symbotic's enterprise value of $2.97 billion looks cheap at 1.7 times this year's sales. However, its dual-class structure -- which grants founder Rick Cohen a 75% stake -- inflates its actual market cap to $22.9 billion.
Based on that market cap, Symbotic's stock doesn't look like a bargain at 13 times this year's sales. But it also isn't too expensive if you believe more companies will automate their warehouses with Symbotic's modules. Precedence Research expects the global warehouse automation market to expand at a CAGR of 16% from 2023 to 2032.
Is it the right time to buy Symbotic?
Symbotic's customer concentration issues, lack of profits on a generally accepted accounting principles (GAAP) basis, and high valuation make it a risky stock to own. That's probably why its insiders sold about 7 times as many shares as they bought over the past three months and why 10% of its outstanding shares were still being shorted at the end of January.
That said, Symbotic could eventually evolve into a more diversified warehouse automation company and generate stable long-term growth if it expands its customer base beyond Walmart and SoftBank. As economies of scale kick in, its profitability could improve, making it a more reliable growth stock. In other words, Symbotic's stock is still a decent speculative play -- but investors shouldn't be too surprised if it gets cut in half before it doubles.
