Serve Robotics (SERV 6.50%) is not a household name yet, but it is definitely rising to prominence in the fast-growing urban logistics space. The company, formerly Uber Technologies' (UBER 0.35%) robotics division, was spun off from its parent in 2021; it designs, develops, and operates low-emissions robots that use artificial intelligence (AI) to operate autonomously, traveling on sidewalks to handle food and last-mile commercial deliveries.
Backed by large investors, including Nvidia and Uber, Serve's business is gaining traction since companies are increasingly adopting automation to improve productivity and efficiency.
Image source: Getty Images.
Serve Robotics has deployed 1,000 delivery robots across five cities: Los Angeles, Dallas, Miami, Chicago, and Atlanta. These robots have already completed over 100,000 deliveries for more than 2,500 restaurants in a partnership with Uber Eats. The company has also entered into a deal with DoorDash to expand its autonomous delivery operations, starting with Los Angeles, and soon to be followed by other U.S. cities.
Serve stock currently trades well below its early 2024 highs. However, in January, Northland Capital Markets analyst Michael Latimore maintained his buy rating on it and raised his target price from $16 to $23.
Latimore has maintained both the rating and target price since then, which implies roughly 40% upside from its Tuesday closing price of $16.45. But is that really a plausible target for Serve Robotics to hit within the next year?
Expanding fleet size
According to forecasts from Grand View Research, the global last-mile delivery market will grow from $132.7 billion in 2022 to $258.7 billion in 2030. Serve Robotics is well positioned to capitalize on this expanding opportunity. It deployed 120 new third-generation robots ahead of schedule and had a total fleet of over 400 robots operating in the second quarter.
Management's goal is to expand its fleet size to 2,000 by the end of 2025 and hit an annualized revenue run rate of $60 million to $80 million following full deployment in 2026. The rapid pace of expansion is expected to position Serve as the first national autonomous last-mile delivery network operating in the urban U.S. As its fleet size grows, the company will start benefiting from stronger economies of scale.
A larger fleet will also collect more proprietary data, which the company can use to train its AI and autonomy models, and help the robots navigate cities even more efficiently. It also helps lower robot intervention rates (events requiring human assistance, such as changing tires) by providing a larger and more diverse data pool, which helps robots make smarter decisions and prevents the overuse of any single robot.
This network effect further improves unit economics and the addressable market for the robotic systems.
A broadening ecosystem
Serve is also focusing on expanding its commercial ecosystem beyond its primary commercial partner, Uber Eats. The company has over 2,500 individual restaurants and stores integrated into its delivery network, nearly eight times more than it had a year ago.
It has announced a pilot program with DoorDash and has started a national delivery partnership with Little Caesars. Its deal with Shake Shack started with a pilot program in Los Angeles and has now expanded to Miami and Atlanta.
Serve is also focusing on high-growth international markets. The company has successfully demonstrated its business model in Qatar with Msheireb Properties and is in negotiations with several potential enterprise clients.
All these sales channels are expected to improve order density and robot utilization, which will eventually boost the company's margins. This will also help it reduce its overreliance on Uber Eats.
Operational strength
Serve has successfully scaled up its business without sacrificing reliability or safety. In the second quarter, delivery volumes rose 78% sequentially, yet the company maintained a 99.8% delivery success rate. Average daily operating hours per robot increased by 20% sequentially to 10.8, while robot intervention rates fell by 25%. Hence, the company stands to benefit from cost advantages in the future.
Financial performance
Serve also saw revenue jump 37% year over year in Q2 to $641,000, driven mainly by a growing fleet and improving utilization. The company had $183 million in cash on its balance sheet at the end of the quarter.
This month, it also announced the sale of 6.25 million shares for a total of $100 million to institutional investors. The funds it brought in from that secondary stock sale will give the company sufficient flexibility to self-fund its operations through 2026, including the planned expansion of its fleet to 2,000 robots. Serve is not yet profitable, but that's not unusual for a growth company in expansion mode.
Valuation
Serve's share price has risen by almost 90% in the past year. While the price fell after the stock sale announcement in October, it has already begun to spring back.
The stock is currently trading at over 430 times sales, which is extremely expensive. However, such elevated valuations are often seen with high-potential companies in the early stages of growth.
Analysts expect revenue to soar 102.1% year over year to $3.7 million in 2025, then by 858% to $35.1 million in 2026, and 103.4% to $71.4 million in 2027. The top line may not be big in absolute terms, but the projected growth is robust.
It is indisputable that Serve is a high-risk investment, considering the heightened risks in execution and capital sufficiency. Despite this, it could maintain an elevated valuation for an extended period as investors price it based on its long-term potential rather than any near-term metrics.
The stock may or may not reach Latimore's $23 per share target price in the next 12 months -- though it definitely has several catalysts working in its favor. Overall, this is a suitable stock only for investors who have a higher-than-average risk appetite, and who can handle some short-term volatility in exchange for the possibility of significant returns over the long run.
