One aspect of the growth potential of artificial intelligence (AI) the headlines often overlook is its ability to revolutionize the automation of warehouses and other key parts of the supply chain.
While robotic systems and AI algorithms working together to move boxes may not be as flashy as chess champion robots, large language models or experimental humanoid robots, they have a huge runway to disrupt the multi-billion-dollar warehouse and supply chain management industries by creating cost savings and improving the safety and efficiency of supply chains.
One of the leading companies in the supply chain automation and AI space is Symbotic Inc. (SYM, Financial). Symbotic is unique among automation companies in that it was founded with the needs of the wholesale grocery business in mind, and with more than 15 years of experience, it has built up a foundation of industry-leading technology and more than 490 patents. With a first-mover advantage, huge barriers to entry and a significant runway for growth, the long-term outlook for Symbotic looks bright.
The future of supply chains
Symbotic’s core offering is a flexible, end-to-end automated warehouse platform that combines intelligent software and autonomous robots to induct, store and receive products, building high-density mixed-product pallets that can then be loaded up for delivery to their destinations.
This system achieves cost savings via greater efficiency, reduced labor costs and by locking in certain costs for the lifetime of the system. According to Symbotic’s customer case studies, each system module costs around $50 million and saves $10 million per year for the 25-year life of the system as well as $50 million in inventory reduction, resulting in an estimated $250 million worth of lifetime savings per module.
Symbotic already has several major customers, including Walmart (WMT, Financial), Albertsons Companies (ACI, Financial) and C&S Wholesale Grocers, and it should benefit from further adoption from these customers in addition to new customers. As per the company’s most recent earnings report for the first quarter of fiscal 2023, it has a contracted backlog worth $12 billion.
Strategic market opportunity
In addition to wholesale grocery, Symbotic’s platform can also be utilized in other industries in need of large-scale warehouse and supply chain automation, such as retail general merchandise, footwear and apparel, consumer packaged goods, food and beverage, etc. The company plans to eventually add new verticals, such as home improvement and auto parts, expand internationally and add more to its product suite.
All in all, the company estimates that it has a strategic available market worth as much as $393 billion. For comparison, the company’s trailing 12-month revenue is $722.6 million, so it’s clear the company expects hyper-growth to be possible for years to come, at least on the top line. The bottom line is a different story, though.
Route to profitability
Symbotic is not and never has been profitable, and the company has provided no guidance on when it expects to turn a profit. It is primarily focused on growth, which will continue to be the case as it spends on research and marketing in order to expand its customer base and eventually achieve international scale.
Circling back to the amount of money that Symbotic claims its customers can save using its platform rather than traditional warehouses that have more human staff compared to robots, while part of those savings are due to greater workload efficiency, I think part of it is also due to Symbotic choosing to sell its systems and software services for much less than what they’re worth. Companies can’t just refuse to pay human workers, but if another company comes along and offers to sell its automation products to do the same job for a huge discount, then they can get a great bargain.
In other words, in the long-term, I expect Symbotic to have a huge opportunity to raise pricing more in line with what their customers once paid for less-automated warehouses, resulting in significant margin improvements. Symbotic will still likely be the cheaper option, not to mention being safer and faster. Once it’s got a big enough foothold, it shouldn’t have to be as drastically cheap in order to continue growing, allowing some breathing room to hike prices.
Notable risks
Due to the ongoing lack of profitability, the biggest risk for Symbotic is that it will run out of cash to make ends meet. The question for investors is, can the company maintain a stable balance sheet long enough for the business to become self-sustaining?
I think the answer is most likely yes, even if it takes a decade for Symbotic’s bottom line to hit the green. As mentioned above, I see a lot of room for the company to hike its prices once it gets a good foothold in the market and customers see more benefits beyond upfront cost savings. That’s on top of its huge market opportunity.
It also has some room to cut research and development and selling, general and administrative expenses if need be, as these categories represent about 20% of revenue apiece currently. This would be far from ideal as cutting these expenses might hurt long-term growth potential, but if push comes to shove, there is room to reduce spending.
As of this writing, Symbotic had $448 million in cash and no debt on its balance sheet following the influx of funding from its merger with a special purpose acquisition company (SPAC) in June 2022 and other rounds of fundraising. The company’s trailing 12-month net loss was $63.1 million, so even if it were to receive no further sources of liquidity, Symbotic would still be able to sustain itself for about seven years at its current cash burn rate. However, this certainly is not an accurate estimate as the company will almost certainly do more fundraising, utilize debt and increase its cash burn rate as it focuses on growth.
Another major risk that Symbotic faces is the risk of supply chain disruption, which is rather ironic given its goals of helping to optimize supply chains. Just like other technology businesses, especially those with a focus on things like automation and AI, Symbotic needs a lot of complex components, especially semiconductors. Any disruption to its semiconductor suppliers or shortages in the raw materials needed to make advanced semiconductor chips could bring Symbotic’s production to a screeching halt.
Other risks include new competitors, failing to accurately predict market trends, not providing enough differentiation from competitors, geopolitical risks and black swan events (such as another pandemic).
Takeaway
Symbotic is an industry leader in automation and AI solutions for warehouse operations and supply chain optimization. It has a huge market opportunity that it has only just begun to tap into, several major customers such as Walmart are already on board and the significant barriers to entry give the company a valuable competitive moat.
This certainly looks like a company to watch going forward. It also seems promising that Symbotic is one of the very few SPAC companies that has seen its stock perform well post-merger:
That being said, I don’t think there’s much fear of missing out in the near-term for investors interested in Symbotic, as the general market sentiment is currently against growth stocks. Moreover, Symbotic still has many years before it becomes profitable, meaning shareholder dilution is not only possible but likely as the company looks to secure further sources of liquidity.
