Is This SoftBank-Backed Robotics Company The Next Big Ecommerce Play?

Is This SoftBank-Backed Robotics Company The Next Big Ecommerce Play?
Reda Farran, CFA

over 2 years ago7 mins

  • AutoStore pioneered cube storage automation, which brings retailers cost, speed, and efficiency benefits.

  • The firm is benefiting from several megatrends like ecommerce and automation, has big growth potential, and has attractive profit margins and free cash flow generation.

  • But its stock isn’t cheap, and the firm comes with risks relating to competition, IP theft, the concentration of its distribution partners, and post-lockup stock price volatility.

AutoStore pioneered cube storage automation, which brings retailers cost, speed, and efficiency benefits.

The firm is benefiting from several megatrends like ecommerce and automation, has big growth potential, and has attractive profit margins and free cash flow generation.

But its stock isn’t cheap, and the firm comes with risks relating to competition, IP theft, the concentration of its distribution partners, and post-lockup stock price volatility.

Mentioned in story

The boom in online shopping has accelerated the transition to cheaper, more efficient automated warehouses, and Norway’s AutoStore has been more than happy to help: the “cube storage” company has revolutionized ecommerce logistics. The company’s scheduled to hit the stock market next week, and here’s why I’m excited about its IPO.

1. AutoStore has a very strong product

AutoStore pioneered what’s called “cube storage automation” – a vertical stacking method that allows retailers to cram up to four times more inventory into the same space, cut labor and warehouse leasing costs, increase fulfillment speeds, reduce order errors, and more.

AutoStore estimates that, from a customer’s perspective, it takes only 1-3 years for the cost-savings to cover the system’s price tag. But perhaps AutoStore’s biggest competitive advantage is that it’s modular, meaning customers can expand the automated warehouse as they grow, rather than invest heavily upfront. Even better, these expansions can be done without any downtime in the existing system.

That might be why the company counts some big-name firms as its customers, as well as plenty of fast-growing ones. In fact, around 50% of the firm’s revenue over the past two years came from existing customers.

Examples of some of AutoStore’s customers. Source: AutoStore’s IPO prospectus
Examples of some of AutoStore’s customers. Source: AutoStore’s IPO prospectus

2. AutoStore is benefiting from various megatrends

Namely: growing ecommerce, changing customer demands, increasing automation, and more focus on sustainability.

Global ecommerce sales accounted for 14% of total retail sales in 2019, and that share’s expected to increase to 25% by 2025. That’ll drive a lot of investments into warehouses to fulfill online orders. What’s more, customers increasingly want fast order fulfillment and same or next-day delivery. That requires a level of efficiency and speed that only automated warehouses can achieve.

Speaking of, there’s a big move toward automation across hundreds of sectors as a way of improving efficiency, cutting costs, and alleviating the impacts of supply chain constraints and labor shortages. As for the sustainability theme, AutoStore’s systems reduce physical footprints, increase energy efficiency, and improve worker safety.

3. AutoStore has big growth potential

AutoStore’s revenue went from $4 million in 2010 to $182 million in 2020 – a nearly 50-fold increase within a decade. And the company is aiming for more than 60% annual revenue growth in both 2021 and 2022.

Part of what’s driving this growth is the huge, untapped market opportunity: only 15% of warehouses are automated today. And according to AutoStore’s calculations, the remaining 85% represents a total addressable market of $135 billion. More specifically, AutoStore predicts that the market for its cube storage automation products will grow at a 33% compounded annual growth rate (CAGR) between 2021 and 2026 (compared to a 49% CAGR between 2016 and 2021). That’s because the firm sees the market benefitting from a rising number of warehouses, an increasing percentage of warehouses being automated, and a growing market share of cube storage compared to other warehouse automation technologies.

4. AutoStore has strong profit margins and generates lots of cash

AutoStore focuses on designing the automation system, but it outsources most of the manufacturing to third parties. This asset-light approach means the firm doesn’t have to use up cash to build factories, expand production capacity as it grows, and so on. That leads to strong free cash flow (FCF) – the amount of cash generated after all necessary reinvestments back into the business. The firm can use its FCF in the future to pay down debt and/or to reward shareholders through dividends and share buybacks

What’s more, AutoStore sells its systems through an extensive network of distribution partners. That way, the firm reduces or eliminates costs related to shipping, installation, maintenance, support, training, and more. That leads to strong profit margins, with the firm consistently achieving an attractive EBITDA (earnings before interest, taxes, and non-cash expenses such as depreciation and amortization) margin of 50% between 2018 and 2020.

AutoStore’s key financial metrics. Note: ROCE = return on capital employed, and FCF conversion is the % of EBITDA converted to FCF. Source: AutoStore’s IPO prospectus
AutoStore’s key financial metrics. Note: ROCE = return on capital employed, and FCF conversion is the % of EBITDA converted to FCF. Source: AutoStore’s IPO prospectus

What are the risks with AutoStore’s IPO?

Its stock is expensive

AutoStore’s IPO is expected to value the company as high as $12 billion and leave it with around $400 million in net debt (total debt minus cash holdings), which brings its total enterprise value (EV) to $12.4 billion. The firm is aiming for more than $500 million in sales next year, so that would imply a 25x valuation multiple using EV to forecasted 2022 sales. That’s pretty steep. For reference, that same valuation multiple for the average S&P 500 company is 5x. So while there’s no arguing that AutoStore has an attractive growth story, it’s partly – if not fully – reflected in the price tag.

It’s facing competition and intellectual property (IP) theft

While the company is probably the only one that offers a commercially available and proven cubic storage solution, it’s competing with other warehouse automation technologies provided by the likes of Daifuku, Knapp, Vanderlande, and TGW, among others.

There’s also a risk that some of AutoStore’s customers or competitors copy its system. Case in point: the firm is in the process of suing rival Ocado for alleged IP theft. Ocado had bought a cube storage system from AutoStore in 2012 and allegedly used it to develop their own system, which it’s been selling on to other firms.

It’s heavily dependent on its distribution partners

Recall that AutoStore sells its systems through an extensive network of distribution partners. But two of those partners – Swisslog and Element Logic – made up more than half the firm’s revenue last year. So it follows that the company’s revenue could take a big hit if either of them decides, for whatever reason, to stop distributing AutoStore’s products.

Its stock price could fall after the IPO lockup period

Current major AutoStore shareholders SoftBank and private equity firm THL will each own around 40% of the firm after the IPO. And while they won’t be able to sell their shares for the first 180 days, they will once this lockup period expires. If they decide to do so in bulk, the flood of supply could add downward pressure on the stock’s price.

So should you invest in AutoStore?

As Warren Buffett once said, “It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

AutoStore, in my view, is certainly a wonderful company. The question, then, is if its price is fair. Let’s say it makes $500 million in sales in 2022 (the company is confident it’ll make more) and maintains its 50% EBITDA margin, resulting in $250 million of EBITDA in 2022. From the table of financial metrics earlier, you can see that the firm has converted, on average, around 85% of its EBITDA to FCF over the past three years. Assuming this doesn’t change, AutoStore will generate around $213 million in FCF.

Remember that FCF is the cash left over after all necessary expenses and reinvestments back into the business. So AutoStore could, in theory, pay out this entire amount to its shareholders through dividends, which would result in a 1.8% dividend yield versus the S&P 500’s 1.3%. AutoStore’s future earnings growth – and by extension its dividend growth – is a lot more attractive than the wider market too. So based on this overly simplified valuation model, AutoStore’s price seems fair.

Lastly, don’t forget that there are thematic ETFs – like the $2.6 billion Global X Robotics & Artificial Intelligence ETF or the $2.5 billion ARK Autonomous Technology & Robotics ETF – that will most likely buy AutoStore after it lists, regardless of its valuation. That’s because the firm is as pure-play as it gets when it comes to the automation and robotics theme. These ETF investment flows – coupled with the fact that fewer than 20% of AutoStore’s shares will be freely available during the first 180 days – could lead to strong price performance soon after the company’s IPO. But there’s no certainty with investing, so, as always, do your own research and consider the risks before investing.

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