Best Ways To Invest In The $400B+ Warehouse Automation Market
We believe Warehouse Automation will be one of the fastest growing industrial tech industries over the next 5 years as secular trends such as e-commerce, labor shortages, higher labor costs and onshoring drive demand for automated solutions. Furthermore, significant advancements in robotics and artificial intelligence are making these solutions a must have in order to compete. The total market opportunity for the entire warehouse automation market could be $400B+ over the next 15 years. However, global companies such as Walmart, UPS, John Deere, Albertsons, C&S Wholesale Grocers and many more are already quickly integrating warehouse automation across their entire supply chains. While the market is massive, we break the warehouse automation into two distinct sectors: Distribution and Fulfillment. Â
Distribution Warehouse Automation refers to automated solutions that are targeted toward distribution centers and are capable of managing incoming freight pallets, and breaking those pallets down to the case level automatically storing and retrieving them throughout a complete warehouse. Companies that offer end-to-end warehouse systems targeted toward distribution centers, include Symbotic, Witron, Honeywell, Dematic, Vanderlande, SSI Schaefer and Swisslog. However, besides Symbotic, most of these legacy systems are challenging to implement and expensive to adapt to changing customer needs and SKU variation, as well as require significant manual labor. They are frequently based on pallet and partial pallet storage techniques, requiring additional inventory and warehouse space.Â
Fulfillment Warehouse Automation refers to automated solutions that are targeted toward fulfillment centers to physical stores and e-commerce. Fulfillment automation solutions focus less on pallet handling, and more on individual SKU storing and retrieval. Providers such as Exotec, Ocado and AutoStore focus exclusively on individual order fulfillment for e-commerce, but distribution automation providers such as Symbotic are expected to enter this market in 2024.
While there are multiple public companies exposed to the warehouse automation market, we believe there are two pure plays an investor should consider to take advantage of this growing theme: Symbotic (SYM) and AutoStore (AUTO.OL). However, based on current valuations we believe AutoStore represents a better opportunity, but would keep your eye on Symbotic in the event of a stock pullback.Â
We dive deeper into both of these companies and our current investment thesis below.Â
Symbotic (SYM) - Hold
Company Overview: Symbotic is an automation technology company that leverages AI-enabled robotics to create an end-to-end warehouse automation system for distribution centers. The company’s platform atomizes incoming pallets to the case level and handles those original cases throughout the system, which includes storing and autonomously re palletizing outbound orders to physical stores. The company will be commercializing Break Pack in 2024, which is an expansion to the platform that atomizes cases to the item level to handle individual SKU orders and serve e-commerce markets. The company has seen incredible adoption with leading retailers and wholesalers in the United States, such as Walmart, Albertsons, Target, Giant Tiger, and C&S Wholesale Grocers. In addition, the company has a massive opportunity through their GreenBox venture to serve the growing demand for outsourced case handling through Warehouse-as-a-Service. Strong demand across several growing verticals has driven sales from $93M in FY20 to $1.2B in FY23, and the company has strong visibility with their order backlog reaching ~$23B as of 2023. Symbotic is traded on the Nasdaq exchange under the ticker SYM, and headquartered in Wilmington, Massachusetts.
Below is an overview video of Symbotic’s solution.Â
Investment Thesis: We view Symbotic has a clear leader in the warehouse automation space, as their end-to-end solution has seen strong adoption across several distribution centers in the US. We are very upbeat on the company’s opportunity with Walmart, and their plan to automate 42 Walmart distribution centers in the US, which accounts for ~$10B of the company’s massive ~$23B backlog. Furthermore, we believe the company’s Greenbox venture to offer Warehouse-as-a-Service, as well as expansion into the fulfillment automation market with Break Pack positions the company for long-term success. So why are we not buyers today? Although excited about the company’s future prospects, Symbotic is trading at ~145x EV/EBITDA based on 2024 estimates, which is a significant premium to their industrial tech peers of ~20x. While the company’s robust backlog can support a premium valuation, Symbotic is just becoming profitable. As the company scales up, we believe revenues and profitability may be lumpy and any slight miss would likely cause shares to decline significantly. In turn, we would closely monitor Symbotic and watch for a pullback to start building a position. Current valuation supports our hold rating on Symbotic shares and $32.59 price target.Â
$432B Market Opportunity: Symbotic estimates their primary strategically addressed market as the total potential spend on their systems over the next 15 years for U.S. warehouses in the general merchandise, ambient grocery, ambient food distribution, consumer packaged food, and apparel verticals to be $144B. When including additional verticals such as non-food consumer packaged goods, home improvement, auto parts, third-party logistics, refrigerated and frozen foods, pharmaceuticals and electronics, there is an additional $177 billion in market opportunity in the US alone. When factoring in plans to expand to Canada and Europe the total addressable market increases by $111B to $432B across all these markets.   Â
Strong Visibility With $23B Backlog Led By Walmart: Symbotic has seen success with several world-wide companies, but Walmart has been a key driver to the company’s success. Walmart has been engaged with Symbotic since 2015, and in 2021 they agreed to install 80 modules across 25 of the company’s 42 regional distribution facilities. In May 2022, Walmart further expanded its agreement with Symbotic to implement 168 modules across all of its 42 facilities in the US. We estimate Walmart’s share of backlog orders to be ~$10B. In addition, the company has a massive opportunity through their GreenBox venture to serve the growing demand for outsourced case handling through Warehouse-as-a-Service. In July 2023, Symbotic and SoftBank Group established GreenBox Systems, a strategic joint venture to build and automate supply chain networks globally by operating and financing Symbotic’s advanced A.I. and automation technology for the warehouse. Symbotic and SoftBank own 35% and 65% of GreenBox respectively. The initial commercial agreement increased Symbotic’s backlog by $11.5B.
Profitability Remains In Question: Symbotic has recently turned adjusted EBITDA positive reporting low single digit adjusted EBITDA margin as the company ramps up deployments. However, on the company’s most recent quarter (Dec-23) conference call, Management indicated near-term headwinds to EBITDA margin expansion as the company is accelerating spend to ramp up deployments. This surprised investors and caused shares to trade down ~20% after earnings. We believe this now begs the question on the company’s true long term operating leverage potential. That said, analysts still expect meaningful margin expansion with adjusted EBITDA margins growing from ~7% in FY24 to ~18% in FY26. We suspect the company will have similar hiccups as seen in the Dec-23 quarter, creating a better buying opportunity.Â
Financial Outlook: Given Symbotic’s ~$23B backlog, we believe the company has incredible visibility for the next several years, and it is now in the hands of Symbotic’s ability to ramp up deployments. We expect revenues to grow 51.8% Y/Y in FY24 to $1.8B, and anticipate the company can sustain 25%+ growth through 2028. However, analysts are extremely bullish on Symbiotic future growth continuing with consensus estimates calling for revenues to grow 40%+ annually over the next 3 years. Our lower growth rate is due to our anticipation deployments this size may take a little bit longer to ramp, but their long term opportunity remains lucrative. Symbotic has seen solid gross margin expansion as revenues ramped. We expect gross margins to further expand 320 bps Y/Y to 19.3% in FY24, and approach 30% by FY28. We believe the company can sustain adjusted EBITDA profitability going forward, but are expecting meaningful operating leverage to take time as deployments scale up. We expect the company to report adjusted EBITDA of $77.1M in FY24, which is below consensus $102M estimate. Long term, we think Symbotic can exceed 20% adjusted EBITDA margins at scale. We also expect the company to continue to generate strong free cash flow to help fund the business and future R&D efforts.Â
Below is an overview of our 5 year outlook with our full financial model here.
(Financials in millions)
Source: Industrial Tech Analyst
Expensive Valuation: Although excited about the company’s future prospects, Symbotic is trading at 145x EV/EBITDA based on 2024 consensus estimates, which is a significant premium to their industrial tech peers of ~20x. While the company’s robust backlog can support a premium valuation, Symbotic is just becoming profitable. As the company scales up, we believe revenues and profitability may be lumpy and any slight miss would likely cause shares to decline significantly. In turn, we would closely monitor Symbotic and watch for a pullback to start building a position. As shown below, we use a 5 year DCF model to value Symobtic shares. Based on our current forecast, Current valuation supports our hold rating on Symbotic shares and $32.59 price target.
Source: Industrial Tech Analyst
AutoStore (AUTO.OL) - BUY
Company Overview: AutoStore is an innovative robotics company and a pioneer in the field of cubic storage automation, which operates in the rapidly growing fulfillment warehouse automation industry. AutoStore develops order-fulfillment solutions to help businesses achieve efficiency gains with the storage and retrieval of goods. The AutoStore System consists of an aluminum grid, robots, bins, ports and a controller. Driven by proprietary software, robots ride on rails along the top of the grid, retrieving bins as needed, bringing them to ports where operators pack orders. This solution provides better use of available space by direct stacking of bins on top of each other and storage of multiple SKUs in a single bin. Over time, the system naturally learns which products have a higher rotation, storing them on the top layer to ensure faster picking times. AutoStore has seen broad adoption from over 1,000 unique customers across a growing number of verticals. AutoStore is traded on the Oslo exchange under the ticker AUTO.OL and is headquartered in Norway.
Below is an overview video of AutoStore’s cubic storage automation solution.
Investment Thesis: We view AutoStore as a clear market winner within the fast emerging automated storage and retrieval market as secular trends of e-commerce, labor shortages and rising labor costs have made their solution increasingly attractive in fulfillment centers across a growing number of industries. AutoStore has a history of strong growth, growing revenues from $78M in 2017 to $584M in 2022 (~50% CAGR). While macro uncertainty as a result of the high interest rate environment, slowed sales and bookings growth in 2023, the company continues to see interest grow and is entering 2024 with a robust backlog of $447M. We view the slowdown in demand as an opportunity for investors, as we believe the company will return to 20%+ growth as macro conditions improve. Furthermore, the company has been able to grow profitably. Driven by ~70% gross margins and lean partner driven operating model, the company reported adjusted EBITDA margins of 47% in 2023. AutoStore is currently trading at 17x EV/EBITDA based on 2024 estimates, which is below our industrial tech comp group (~20x) and their closest public peer Symbotic (~145x). We believe as macro conditions improve, current estimates will end up being conservative and likely drive multiple expansion. Our robust outlook drives our bullish stance on AutoStore shares and price target of 26.90 NOK, which equates to ~50% upside at current levels.
$230B Market Opportunity Across Diverse Vertical Base: AutoStore estimates in their 2022 annual report their addressable market for automated storage and retrieval systems (AS/RS) is ~$230B. AutoStore’s modular solution allows the company to address almost the entire market, including large fulfillment centers, micro-fulfillment centers and small businesses. As shown below, AutoStore has seen their customer list nearly double over the last two years to ~1,000 customers in 9 different verticals. With the expectation of e-commerce, labor shortages and rising labor costs continuing to grow, we believe AutoStore offers a unique value prop many industries will seek. Furthermore, given the high switching costs, we believe customers will be reluctant to switch to other alternatives, as more competition comes.Â
Source: AutoStore 4Q23 Earnings Presentation
Robust Profitable Business Model: AutoStore has not only seen incredible growth over the last 5 years, they have been able to grow profitability. Driven by ~70% gross margins and lean operating model, the company reported adjusted EBITDA margins of 47% in 2023. The company’s lean operating model is driven by their network of over 20 qualified system integrators referred to as partners that distribute, install and service the AutoStore system. The company is also generating strong free cash flow, which grew to $174.4M in 2023. We expect strong free cash flow generation to continue, which will allow them to further fund the business and additional R&D efforts to sustain their leadership position.Â
Financial Outlook: While macro uncertainty as a result of the high interest rate environment, slowed sales and bookings growth in 2023, the company continues to see interest grow, and is entering 2024 with a robust backlog of $447M. We expect revenue growth to be muted through most of 2024, but our cautiously optimistic macro improves in 2H24 with the expectation interest rates will start to come down. Our current estimation is for revenues to grow 7.5% Y/Y to $695.3M, which is modestly below consensus estimates of $698.2M. As we look into 2025 and assuming the macro improves, we expect revenues to accelerate and sustain 20%+ growth through 2028. That said, AutoStore saw revenue growth of ~80% in 2021 and 2022. Given the strong macro tailwinds driving companies to automated solutions, we would not be surprised to see our estimates end up being very conservative when we return to a normalized environment. That said, even in a challenging operating environment we expect the company to sustain ~70% gross margins. We do expect opex to grow with revenues, but anticipate operational efficiencies will allow the company to see adjusted EBITDA margins reach 50%+ by 2028. This would imply $750M in adjusted EBITDA based on our $1.4B revenue estimate.Â
Below is an overview of our 5 year outlook with our full financial model here. Â
(Financials in millions)
 Source: Industrial Tech Analyst
Attractive Valuation: AutoStore is currently trading at 17x EV/EBITDA based on 2024 consensus estimates, which is well below our industrial tech comp group of ~20x. Furthermore, their closest warehouse automation peer, Symbotic, is trading at a significant EBITDA premium of ~145x. While Symbotic’s high valuation is supported by a $23B+ backlog driven by Walmart, we believe AutoStore can experience similar growth as Symbolic but with better profitability. Although we believe Symobtic valuation is currently overvalued, as growth returns we would not be surprised to see AutoStore trade at premium higher than our industrial tech comp group. We also believe as macro conditions improve, current estimates will end up being conservative.Â
As shown in our table below we use a 5 year DCF model to value AutoStore shares. We also value shares in Norwegian Krone (NOK) given they are sold on the Oslo Exchange. Based on our current forecast we value AutoStore at 26.90 NOK, which equates to ~50% upside at current levels.
Source: Industrial Tech Analyst
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