Why Is AutoStore Seeing Revenue Growth Slow?

Revenues are a proxy for market share being captured. If you’re not growing revenues, you’re losing market share to competitors. In the case of large total addressable markets (TAMs), there may be enough opportunity to go around, which means there should be no impediments to growing fast except internal constraints. So, if the warehouse automation opportunity is a $100 billion blue ocean opportunity, then why is AutoStore (AUTO.OL) seeing revenue growth stall?

Editor’s Note: All numbers in this article are USD unless stated otherwise.

AutoStore’s Revenue Growth

Double-digit revenue growth is nothing to sneeze at, but slowing from 78% growth in 2022 to 11% in 2023 is a dramatic decline. The CEO’s letter describes their progress in 2023 as “significantly outpacing the light AS/RS warehouse automation market, which declined 16 percent,” according to a “top-tier management consulting firm.” With only around 20 percent of the market penetrated, there is plenty of opportunity left to capture with $6.5 billion in pipeline orders. When successfully converted, these become “backlog” which stands at $447 million which is a good start to 2024. That all sounds good on paper, but as we’ve said before, the only ground truth is revenue growth. So, when AutoStore decided to stop providing guidance, analysts became understandably concerned.

AutoStore’s Guidance

Revenues guidance doesn’t just provide investors with an indication of growth to expect, it demonstrates that a management team understands their business sufficiently well to forecast growth. AutoStore’s $6.5 billion pipeline number implies they track their sales as any other enterprise would, and each stage of the sales pipeline is weighted by likelihood which provides a forecast number. In 2022, AutoStore beat guidance by 1%, then missed it by 11% in 2023. Now, their only guidance is that they “remain highly optimistic about our future growth,” which means squat. Instead of using their recent guidance miss as an opportunity to reflect and improve, they’ve decided to remove guidance altogether. The quarterly report doesn’t help much either.

AutoStore continues to see improved order intake, and high market activity measured by an increased pipeline, underpinning further growth in 2024. At the same time, in this environment, it is challenging to predict accurately the time it takes to move opportunities through the pipeline to order intake and, ultimately, to revenue.

AutoStore

Maybe they need a BSD sales manager to start whipping the sales team into shape instead of retreating to the “stay cautiously optimistic” cave. The earnings call saw analysts repeatedly inquire about more color around guidance, but the answers were evasive and largely useless. Analysts queried AutoStore about previous comments regarding “customers postponing orders or extending decision-making cycles,” and the responses about expecting backlog to convert at 75% to 80% seemed off. Shouldn’t backlog just simply be confirmed orders that need to be filled? In the meantime, AutoStore’s competitors have no problems showing growth.

The Competition

Our tech stock catalog contained four pure-play ways to invest in warehouse robotics until Berkshire Grey was acquired. Now we have two other choices aside from AutoStore – Symbotic (SYM) and Ocado Group (OCDO L). While Symbotic saw 2023 revenue growth of 99%, that’s misleading for two reasons. They’re not directly competing with AutoStore AS/RS systems and 88% of their revenues come from a single client – Walmart. That doesn’t provide a very complete picture of what’s going on in the market.

As for Ocado, they’re a company we used to hold before AutoStore became publicly traded. One reason we exited that position is because the exposure we were getting to their U.K. grocery business dwarfed the small exposure we were getting to robotics. With Ocado’s “Software and robotics platform” seeing 44% growth in 2023, that segment now represents 12% of total revenues, up from 9% in 2022.

So, how come Ocado could grow robotics revenues 44% last year while AutoStore produced “just” 11% growth? Perhaps it’s because Ocado is largely deploying their solution in the grocery industry only while AutoStore targets multiple industries. While AutoStore enjoys gross margins around 70% selling hardware, Ocado is providing their “platform as a service” which provides recurring revenues which are much more appealing and command the same fat margins. This begs the question of how AutoStore plans to fuel growth once the 20% market penetration inevitably levels out closer to 100%. Replacement parts and service contracts can only go so far, something we talked about in last year’s piece on AutoStore titled, AutoStore Stock Adds Warehouse Automation as a Service.

The above planned offering by Autostore was demanded by their customers and increases the likelihood of adoption by minimizing the upfront costs associated with implementing capital-intensive hardware solutions. As we concluded then, the company needs to break out recurring revenue separately so we can monitor progress on this important initiative.

As for 2024 forecasts, Ocado also sees growth of their robotics platform slowing to “just” 17.5% at the midpoint of guidance. That’s a good segue into AutoStore’s settlement with Ocado.

Cash Flows and the Ocado Settlement

One reason we hesitated to invest in AutoStore was their pending litigation with Ocado Group that’s now been resolved in favor of Ocado. That means AutoStore now needs to pay $256 million to Ocado which is on a monthly payment plan over the next two years. Despite this burden, AutoStore was still able to realize $153 million in positive operating cash flows for 2023 thanks – in part – to their high gross margins of which they see as sustainable over time. Cash on hand went from $175 million in 2022 to $253 million which means they won’t likely need to sell more shares or take on additional debt (current long-term debt sits at $433 million)

AutoStore’s Valuation

Our simple valuation ratio (SVR) is great for comparing a stock to other stocks, but it’s even more meaningful when we examine it over time. Below you can see AutoStore’s SVR which is trending lower lately.

While there is some seasonality in quarterly revenues, we’re seeing the effects of uncertainty around AutoStore’s ability to grow in an environment that a “top consulting firm” says is undergoing a temporary retraction, but which remains 80% unpenetrated. Don’t expect the above trend to reverse until revenue growth resumes. One appeal of automation is that companies want to implement it in good times or bad, so it’s truly perplexing why growth would slow during ye old macroeconomic headwinds.

Conclusion

AutoStore’s decelerating growth is a concern that might be overlooked if we believe the decline in demand is a symptom of a slowdown in the broader AS/RS market. Companies of all types say that it takes longer to get signatures, but solutions that save money should be even more in demand when times are tough. While the uncertainty around the Ocado drama has lifted, that’s been replaced by concerns about the lack of guidance. Temporary slowdowns aside, our biggest concern is that AutoStore gets some meaningful recurring revenues in place to protect against downturns like we’re seeing now.