Symbotic (NASDAQ: SYM) is a high-tech stock that has had a painful go of it as of late, but many are still bullish on the name. Overall, the average price target of $43.23 implies that it has the potential to be a double-bagger investment. Let's dive into what the company does, how its financial performance is trending, and what comes next for the industrial sector firm.

Symbotic: A “Game Changer” in Warehouse Efficiency

Symbotic has one reportable segment. It divides its revenue into systems, software maintenance and support, and operational services. The software maintenance, support, and operations streams involve software updates and training customers on how to use the systems best. However, through the nine months ended Jun. 29, 2024, systems revenue made up 96% of total revenue.

So, what exactly are Symbotic's systems? Symbotic's systems are fully automated robots. They sort, move, store, and retrieve packages in a warehouse.

When packages arrive at a warehouse using Symbotic's technology, the robots can handle nearly every task needed. They unload the pallets and scan them to detect their contents. They can also identify the best place to store a specific package and determine if it needs human repair due to damage.

Once the packages are properly sorted, the “Symbot” mobile robots pick them up and transport them to their designated spot in the warehouse. The robots can travel at speeds of 20+ miles per hour. The company's AI software also lets the robots sense changes in the facility and product demand. They can then make real-time decisions on storage efficiency.

The company says its systems can increase package density by 50% compared to human packing. This makes it much easier for human forklift operators to move blocks of packages, reducing labor costs. It also improves responsiveness to demand, which is key for Symbotics' customers to maximize profits.

For example, it helps reduce the number of products that might be out of stock at a store due to high demand. If those products are fully stocked due to Symbotics' efficiency, the company can maximize sales. It can also stop customers from buying from competitors. The Vice President of Supply Chain Operations at Walmart (NYSE: WMT) U.S. has called Symbotic’s systems “a game changer."

Symbotic Is Growing Revenue, and Becoming More Profitable

Symbotic has grown its revenues and profitability substantially over the last three years. Quarterly revenue has increased by over five times since Sept. 2021, and the operating margin went from –34% to -5%.

And on the true bottom line, the company has nearly reached profitability, with a net income margin barely below 0%. When it comes to an unprofitable company, simultaneous growth in revenues and profitability is great to see.

One concern, however, is the drop seen in the company’s adjusted gross margin last quarter. The figure fell by over 400 basis points to 15.6%. This is a concern because the company’s revenue cost is generated from installing its systems. Installing these systems is extremely expensive. The company likely cannot be a great investment unless it significantly improves here. It has already driven large margin improvement in other parts of the business. This has driven overall profitability improvement while the gross profit margin has remained relatively stagnant.

Gross Margin Improvement: An Important Point of Emphasis

After their latest earnings, shares plummeted 24%, largely due to this gross margin decline. The company beat sales estimates by 6%. It said “elongated construction schedules and implementation costs” caused the gross margin to fall.

It is working to improve its installation process, which may slow revenue growth in the short term. This is another reason for the stock price drop. The company expects the gross margin to return to historical levels in the next quarter.

Taking this hit now to improve margins is good news, assuming it shows improvement going forward. The company has a backlog of $23 billion. That’s nearly 14 times the revenue it generated in the last twelve months. But that backlog is only greatly beneficial if it can install the systems profitably.

The backlog alone shows a huge demand for these products. It supports the long-term thesis about automated warehouse systems. However, it feels like the company is at a bit of an inflection point. It needs to show significant improvement in its gross margin next quarter to create optimism around a stock that has fallen 59% this year.