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Spending time in the corporate world helps investors understand more intuitively how businesses operate. Performance improvement plans are large collections of documentation used to exit people. Promotions are rarely predictable. And when two businesses interact, one is always the alpha. Vendors who provide services to large companies are always on the lowest rungs of the dominance hierarchy. That’s because they have almost no leverage at the negotiating table. If a vendor provides a critical function, there will usually be a second vendor in the shadows who can easily provide a substitute if necessary. So, when a vendor counts on a single customer for more than half their revenues, it’s a big risk, especially when the customer is Walmart (WMT).

An introduction to what Symbotic (SYM) does can be found in our piece on Symbotic Stock: A Pure Play on Warehouse Automation. Understanding the roots of this company will help explain why the Symbotic S-1 filing document contains 139 mentions of C&S Wholesale Grocers. Founder, Chairman, and CEO of Symbotic, Rick Cohen, also happens to be the sole owner of C&S Wholesale Grocers, the largest wholesale grocery distributor in the United States. After turning a third-generation regional grocery distributor into the eighth most valuable private company in America, he began developing technology for his own warehouses using his own funds. That morphed into what Symbotic is today, and Mr. Cohen holds a 75% stake following the SPAC merger which was formalized last month. That’s according to a glowing article by Forbes that does a sufficient job of describing the bull thesis. We’re here to explore what’s not to like about Symbotic.

Customer concentration risk is always a big red flag, and two customers have dominated Symbotic’s revenues over the past several years. One is Walmart and the other could be Target, or Albertsons, or even an undisclosed customer.

The other company is probably not Mr. Cohen’s own grocery distribution empire because that’s considered a related party and they need to spell out related party revenues. We’re told that Symbotic has customer contracts with C&S relating to software maintenance services and the operations of a warehouse automation system. Here’s the revenue generated versus the cost of goods sold (COGS) which shows margins increasing over time.

The trend shows that Walmart and one other key customer are becoming an increasingly large percentage of Symbotic’s total revenues. Symbotic’s SPAC deck talks about how Albertson’s has two distribution centers using their platform, but we can’t be sure that’s who “customer number two” is. And one other interesting antidote – the Walmart deal contains a provision that says, “restriction on sales to one specific company.” Maybe that’s Target?

At 124 mentions in the S-1, Walmart is a critically important stakeholder for Symbotic. Since 2017, the two companies have been working closely together to optimize robotics solutions in a Florida distribution center. In July of last year, Walmart issued a big vote of confidence by announcing that Symbotic’s technology would be rolled out in 25 of their 42 regional distribution centers. Press coverage talked about the rollout taking “several years,” but the Symbotic S-1 document filed just weeks ago paints a different picture. A “substantial majority” of the $5.4 billion in backlog belongs to Walmart, and here’s how they plan to deliver it.

Add to that another $6.1 billion of contracted backlog that materialized this past May when Walmart announced they would implement Symbotic’s robotics and software automation platform in all 42 of their regional distribution centers over the coming years. In a blog post last July, a Walmart supply chain bigwig describes the pain points being solved.

When it’s time for the product to go to a store, someone is tasked with packing a 53-foot trailer in a human game of Tetris for transit. When the truck arrives at a store, our associates unload it manually and get the items where they need to be.

Symbotic uses a complex algorithm to store cases like puzzle pieces using high-speed mobile bots – operating with a precision that speeds the intake process and increases the accuracy of freight being stored for future orders. By using dense modular storage, it also expands building capacity. And by using high-speed palletizing robotics to organize and optimize freight, it creates custom store- and aisle-ready pallets, which take the guesswork out of unloading trucks.

Only people who have run pallets from a truck into a store’s aisles and stocked shelves can appreciate just how much efficiency is being created here. Walmart’s CTO wants to get this rolled out as quickly as possible so that he can tell the Board of Directors just how successful their technology initiative is coming along.

Symbotic’s primary focus isn’t developing new customer relationships, it’s filling at least $8.8 billion in backlog for Walmart, a firm that’s not only a customer but also a shareholder with 11% ownership. Bulls will point to the possibility of an acquisition here, and such speculations may already be baked into the valuation.

Our recent look at Berkshire Grey saw how they’re undervalued compared to AutoStore, but both firms are trumped by Symbotic which currently has a simple valuation ratio of nearly 25.

To put that into perspective, Symbotic is now one of the most richly valued stocks in our tech stock catalog sidling up to the likes of Snowflake (below numbers as of June 29th, 2022).

It’s understandable. SPACs attract a lot of attention, especially when they come with a salacious story. A warehouse automation company that’s getting into bed with Walmart may sound like the next Tesla, but it’s a double-edged sword. As rich and successful as he might be, Mr. Cohen now dances to the beat of Doug McMillon’s drum. Retail investors will whipsaw the stock price all over the place as new information becomes available, and that share price volatility will translate into more risk. Most investors will pay attention to the marquee name – Walmart – without considering the risks of relying so heavily on a single customer.

Watching the customer concentration numbers will prove useful in monitoring the Walmart dependency, but be wary of revenue timing. Check out this excerpt from Symbotic:

For the three months ended March 26, 2022, one customer represented 92% of the Company’s total revenue.

But last year in the same quarter, a single customer accounted for 77% of revenues. That’s why investors should monitor customer concentration numbers at an annual level.

Case studies get MBAs to think outside the box and make decisions or decipher situations with limited information. Mr. Cohen started developing a warehouse automation solution to address his own needs. Walmart’s competitor Target came on as the first Symbotic customer in 2014 and the following year Walmart came on. The decision to increasingly focus on two customers isn’t optional, it’s what happens when you get into bed with America’s largest employer that has a strong appetite for technology solutions that can cut costs.

“C&S is successful largely because Rick was able to negotiate a lot of acquisition deals at favorable terms to him. . . . When you are negotiating with Rick Cohen, you know you are negotiating with a pretty formidable negotiator.”

Mr. Cohen may be a strong negotiator, but how much leverage does he have at the negotiating table when his largest customer decides the fate of his company? His focus right now isn’t on landing more customers, it’s on keeping Walmart happy.

The aforementioned Forbes piece cited Ash Sharma, senior research director at Interact Analyst, making a very good point. So, like any MBA would, we’ll paraphrase his point and pretend like it’s our idea. What’s likely to happen is that other firms will see Walmart cozying up to Symbotic as a red flag. Remember how many customers were left hanging when Amazon acquired Kiva? Should Walmart decide to outright acquire Symbotic, where does that leave their other customers? The fact that Walmart alone increased the $5.4 billion backlog (of which they accounted for a substantial majority) by an addition $6.1 billion tells us everything we need to know about how increasingly reliant Symbotic will become on Walmart.

Like Berkshire Grey, we see Symbotic’s quarterly revenues are lumpy, perhaps a symptom of having several large customers driving orders.

We also see how their gross margins are slowly increasing over time as they scale, something that should make Berkshire Grey investors salivate.

We’ll conclude this by saying that information coming out of Symbotic is sparse. Just look at their last earnings deck. This is a common side effect of firms that spend all their time executing, and it’s also characteristic of a company that’s focused on serving several customers which don’t want their dirty laundry aired in someone else’s regulatory filings.

Walmart is one of the 30 dividend growth investing stocks we’re presently holding, so we couldn’t be happier to see a successful use of technology to reduce costs. That said, we’ve always avoided companies with high levels of customer revenue concentration, and Symbotic is no exception. Expect lots of volatility going forward as retail investors react to news both good and bad. Walmart’s commitment to Symbotic is a testament to the quality of their technology, but it’s also an indicator of how much low-hanging fruit there is in warehouse automation. There’s plenty of total addressable market to go around for everyone.

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