AutoStore Stock: A Warehouse Automation Pure Play
Table of contents
In today’s world of 8-second attention spans, it’s hard to convince people that becoming wealthy is about time in the market, not timing the market. That’s why we developed our own risk-averse tech investing strategy where we hunt out leaders and ideally hold them for a decade to let all that delicious alpha mature – like a fine bottle of Opus One. The process goes something like this:
- Find large blue ocean total addressable market (TAM) opportunity
- Identify leader of the pack
- Accumulate stock using dollar-cost-averaging and buy dips
- Hold the stock until
- Thesis changes (company has problems)
- Corporate event happens (i.e. an acquisition)
- Something better comes along
That last bullet point is a tricky one. Our recent sale of Blue Prism and purchase of UiPath (PATH) is an example of moving from one RPA stock to a better RPA stock. Though these two events were unrelated, our perception of Blue Prism changed entirely when a leader – UiPath – decided to go public. Another example would be when geospatial leader Planet announced plans to go public. Spire Global (SPIR) suddenly became a whole lot less appealing.
When it comes to proper warehouse automation, the thesis sells itself. Warehouses that power the global supply chain represent a massive TAM of $230 billion when it comes to robotics and automation. There’s no better time to sell robotics solutions to the 85% of warehouses out there that lack any form of automation and are currently dealing with lots of supply chain volatility. The massive warehouse automation opportunity is precisely why we invested in Ocado Group (OCDO.L) nearly a year ago. Just recently, we learned that a Norwegian warehouse automation company was having an initial public offering (IPO), so we wanted to see if it would provide a better substitute than Ocado Group.
The AutoStore IPO
When going to take a look at the AutoStore IPO prospectus, we ran into a showstopper. As many countries in the world have found out the hard way, sometimes it’s best to not let the Yanks play in your sandbox.
This is when we used our decades of experience in the financial sector to pull some strings and make stuff happen.
Here’s how you can access this document as an American. If you choose “United Kingdom” from the “Please choose which country you are from” dropdown, Bob’s your uncle. That’s right, start speaking like a Brit and you’re sorted, except for one final roadblock.
For the 51% of our readers who physically reside in ‘Murica, this is where you’ll have to take the piss. Using the powers of transcendental meditation, transport yourself outside the United States, click confirm, and you’re sorted. (All numbers in USD unless otherwise stated.)
AutoStore is a robot technology company – a leading provider of automated storage and retrieval systems (AS/RS) and warehouse management and control systems (WMS/WCS) through third-party distributors.
Credit: AutoStore
About AutoStore Stock
With a legacy going back to 1996, the story really begins in 2019 when private equity firm Thomas H. Lee Partners (THL) acquired AutoStore, then sold 40% of the company to SoftBank (THL still owns just over 50% of AutoStore). The verbose 492-page AutoStore IPO prospectus provides financial information in USD which is awful handy, but is a tough read because of a rather confusing legal structure that’s being consolidated (Automate LuxCo and Terminator). Looking past all that clutter, we see a company focused on a major pain point for warehouses – storage and picking – which accounts for 63% of the costs of running a warehouse.
AutoStore has described the blue ocean opportunity extensively in their prospectus document, perhaps too extensively. It’s best understood by taking a bottom-up approach which looks at what AutoStore claims to be a leader in – cube storage.
Cube Storage
In cubic storage, products are stored in containers stacked in a cube of up to 18 feet in height, with mini robots moving atop the cube retrieving containers with goods. This flexible and precise solution is particularly suited for high throughput demands and space-constrained warehouses. It is the densest solution on the market and, given its modularity, it is very easy to scale after installation.
AutoStore considers itself the undisputed leader in the cubic storage market based on number of installations (667 installations as of June 2021) compared to 15 installations by other leading players in the market, namely Ocado and Attabotics (as of April 2021). The majority of the Group’s 667 installations or contracts are based in EMEA (71%), with Germany alone accounting for 26%. Around 18% of installations are in the United States.
While Ocado targets grocery retailers, AutoStore is far more diversified across industries. some notable AutoStore customers include names like Best Buy, ASDA, Siemens, Ikea, UPS, John Deere, and DHL.
What AutoStore is doing looks similar to what Ocado is doing, so it’s no surprise to see these two competitors having a go at one another.
Ocado Group vs. AutoStore
About a year ago, AutoStore filed multiple, separate legal actions against Ocado Group in several jurisdictions – the United States and United Kingdom – with a final determination expected in March 2022. In response, Ocado launched their own legal attack earlier this year for patent infringement claims in multiple jurisdictions and an antitrust violation claim in the United States.
It’s annoying that these companies waste time and energy in the courts battling over intellectual property because it makes both less appealing. That time and energy could be spent capturing market share of which there’s plenty to go around.
AutoStore lists established competitors in the broader AS/RS space outside of just cubic storage. In addition to new entrants, the company expects increased competition from existing competitors, including (among others) the following names:
- Daifuku (Japan) – a leading provider of material handlings systems since 1937 with offices in 26 countries
- Knapp (Germany) – one of the world market leaders in warehouse logistics and automation with over 4500 employees and 43 locations worldwide
- Vanderlande (Netherlands) – the world’s fourth-largest materials handling systems supplier
- TGW (Austria) – plans and implements highly automated, future-proof fulfillment centers around the world
The companies listed above are able to handle larger and heavier goods and/or provide the ability to offer more favorable utilization rates with more aggressive pricing.
The AutoStore IPO is expected to raise net proceeds of around $276 million of which they’ll use approximately $236.6 million to retire some of the nearly $1 billion in debt on their books. While that large chunk of debt is something to keep an eye on, the company appears to be managing that risk.
The AutoStore prospectus is chock full of interesting information, but we now have enough to answer the big question. If we could buy AutoStore stock at a reasonable valuation, would we?
Should You Buy AutoStore Shares?
If 95% of active money managers can’t beat a benchmark, what makes you think we can? That’s why we don’t give financial advice, we only tell you what investment decisions we make with our own money.
Turns out we can’t just go to Interactive Brokers, buy some Norwegian kroner, then purchase AutoStore stock. Even though we’re approved to purchase some stocks (like BICO Group) on Norwegian exchanges like the Nasdaq Nordic, we’re not able to trade stocks on the Oslo Stock Exchange (like Aker ASA). Why? Who knows, but it doesn’t appear Americans can buy shares of AutoStore even if they wanted to (our own tech stock portfolio uses a U.S. domiciled account). So, this presents a difficult conundrum.
We now know about a publicly traded company that’s a pure-play on warehouse robotics compared to Ocado’s exposure which represents 7.8% of total revenues if we exclude intersegment revenues (where Ocado sells itself its own robotics solution). The problem is, we can’t buy AutoStore stock to replace Ocado Group, and we’re not sure we’ll ever be able to.
For our friends across the pond who are able to buy shares of AutoStore, we can use our simple valuation ratio to see what a fair valuation might be. For the six months ended 30 June 2021, AutoStore generated revenues of $149.6 million. That’s roughly $300 million annualized. Reuters reported that the IPO could give AutoStore a valuation of around $10 billion which results in a ratio of around 33:
- Market capitalization / annualized revenues
10,000 / 300 = 33
It’s on the rich side, but acceptable, as we only invest in companies with a simple valuation ratio of 40 or less.
External factors are increasing the demand for solutions like AutoStore’s as a major labor shortage afflicts global supply chains.
AS/RS solutions typically enable close to a 55% total cost reduction, with the vast majority of that reduction coming from labor cost savings.
Credit: AutoStore
There’s every reason for companies to invest in warehouse robotics solutions now, especially if you think some economic turmoil might be around the corner.
Should We Sell Ocado Group?
The other problem we’ve been mulling over is Ocado’s exposure to the U.K. grocery business which constitutes 92.2% of revenues (with intersegment robotics revenues removed).
Do we really want U.K. grocery exposure right now given what we’ve been hearing about empty grocery store shelves in the U.K., or should we exit stage left with a 10-15% loss on our original investment? Just because Ocado utilizes delivery doesn’t mean they’re not running into problems – like not being able to deliver frozen foods because of a CO2 shortage. If Ocado Group falls, and we buy the dip as we do with any stock we hold, 92.2% of every dollar we’re investing is a bet on the U.K. grocery industry, not warehouse robotics technology. If we’re going to sell Ocado Group, now would be a prudent time to do so
Our warehouse automation thesis hasn’t changed, but our desire to have such high exposure to an unintended sector (U.K. grocery) means it may be time to rethink our Ocado position. Nanalyze Premium annual members will be the first to know if we exit Ocado Group.
Conclusion
Pure-play stocks help investors know exactly what they’re betting on. Stocks with exposure to unintended segments result in unintended bets. If you don’t invest in pure-play stocks, you’ll be put in an awkward position when your unintended bet goes pear-shaped. Compared to Ocado Group, AutoStore is a lot more appealing, especially considering how industry agnostic their solution is. With all the labor shortages we keeping hearing about, there’s no better time to automate warehouses. Hopefully, this interesting Norwegian robotics firm will list on an exchange that’s more accessible to investors across the pond.
Share
AutoStore Holdings has resolved to launch the initial public offering and will apply for a listing of its shares on the Oslo Stock Exchange, which could value the SoftBank-backed company at up to $12 billion.
Subject to approval of the listing application and a successful completion of the Offering, the shares of AutoStore are expected to be admitted to listing and commence trading on an “if sold” basis (i.e. conditional trading) on the Oslo Stock Exchange on or about 20 October 2021. Unconditional trading is expected to commence on or about 22 October 2021.
The Offer Shares will be offered at a price per share between NOK 27 and NOK 31.
It’s a real shame that foreign investors can’t get in on the action here, provided it prices at a fair valuation. There’s a lot to like about the stock. In an article we came across while doing research, the CEO said something to the effect “we’re a Norwegian firm so we’re listing in Norway,” when asked about whether they had plans to list on an exchange outside of Norway. Hopefully, it becomes accessible to more investors, but at least we learned a lot looking at their prospectus.
There are brokerages that allow you to invest in companies that are listed in the Oslo Bors exchange. Most notably, Fidelity allows you to buy shares of AutoStore.
This is very useful to know Carl. We’ll have to ask our broker then. We only assumed one couldn’t based on the fact we couldn’t buy shares using IB ourselves.
Right now the simple valuation ratio is still to high (around 50) with a market cap of ~$15 billion USD and annualized revenues of around 300 million.