3 things to know before buying symbolic stocks

symbolic (SYM 1.81%) It attracted a lot of attention when it merged with a special acquisition purpose company (SPAC) and went public on June 8, 2022. The warehouse automation company’s stock opened at $10.54 and rose over the next year, closing at an all-time high of $63.54. July 31, 2023.

The Symbotic bull case was easy to understand. The company’s autonomous robots handle pallets and cases more efficiently than human workers, and with just a $50 million investment in one of its modules (modules that bundle robots and software), he can generate $200 million over 25 years. The company claimed $50 million in savings.

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Symbotik was also backed by a Japanese conglomerate. Softbank (SFTB.Y 0.92%)owns the SPAC to which it is merging; walmart (WMT 0.09%), acquired an 11% stake in the company. From FY 2021 to FY 2023 (ended last September), the company’s revenue grew at an impressive compound annual growth rate (CAGR) of 116%, with analysts predicting a CAGR of 44% from FY 2023 to FY 2023. We expect it to continue to grow. 2026.

Symbotic’s stock price is down to about $40 as of this writing, but it’s still up about 280% in less than two years. There may still be room for upside, but investors should keep three things in mind before joining the bulls.

1. Walmart is our biggest customer

In fiscal 2023, Symbotic derived 88% of its revenue from its Master Automation Agreement (MAA) with Walmart. The agreement runs through 2034 and aims to automate all 42 of Walmart’s U.S. regional distribution centers.

Walmart’s investment in Symbotic also gives it greater control over the company’s decisions. While Walmart can designate one of its senior employees to sit on all of Symbotic’s board meetings without voting rights, Symbotic may not consider transactions that affect more than 25% of its total voting rights. If there is an obligation to notify Walmart. The partnership with Walmart also prohibits Symbotic from providing services to unnamed “certain companies.” This is very similar to the company’s top competitors; Amazon.

Symbotic serves other customers such as the goal, albertsons, C&S Wholesale, etc., but the overwhelming dependence on Walmart cannot be ignored. If we don’t meaningfully expand our non-Walmart customer base before every warehouse in the country is fully automated, sales growth will suddenly stall.

2. You just “created” another major customer.

Last year, Symbotic formed a warehouse-as-a-service joint venture with SoftBank called GreenBox. Symbotic will own his 35% of GreenBox, and a SoftBank subsidiary will own the remaining 65%. GreenBox will exclusively purchase its systems from Symbodic through his $7.5 billion deal, which will last for six years, starting in fiscal year 2024.

Symbotic believes GreenBox’s modules, once fully installed, have the potential to generate more than $500 million in annual recurring revenue. This represents approximately 14% of the expected revenue for FY2026.

While this sounds like a promising step toward diversifying sales away from Walmart, Symbotic remains dependent on its other major investor, SoftBank, to accomplish that. Symbotic’s own exposure to his GreenBox as an investment could also backfire if the joint venture fails to carve out a meaningful niche in automated warehouse services.

3. Dual class shares inflate valuations

At first glance, Symbotic’s $2.97 billion valuation looks cheap considering it’s 1.7 times this year’s sales. However, due to the dual-class structure that gives founder Rick Cohen 75% of the shares, the actual market cap balloons to $22.9 billion.

Based on its market capitalization, Symbotic’s stock price is 13 times this year’s sales, which doesn’t seem cheap. But it’s not that expensive when you consider that more companies will use Symbotic’s modules to automate their warehouses. 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 symbolic?

Symbotic is a risky stock to own due to customer concentration issues, a lack of generally accepted accounting principles (GAAP) profits, and a high valuation. This is likely why the company’s insiders sold about seven times as many shares as they bought in the past three months, and 10% of outstanding shares remained short at the end of January.

However, by expanding its customer base beyond Walmart and SoftBank, Symbotic could eventually evolve into a more diversified warehouse automation company and generate steady growth over the long term. Economies of scale can improve profitability and make a stock a more reliable growth stock. In other words, Symbotic’s stock price remains a decent speculative play, but investors shouldn’t be too surprised if it halved before doubling.