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Serve Robotics: Dilution Likely, Stay Clear

seekingalpha09-28

Serve Robotics faces significant challenges in scaling operations and achieving profitability due to unproven technology, high costs, and intense competition.Uber and Nvidia's investments are ...

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While the potential for autonomous delivery has gathered significant hype in the past, we believe that Serve Robotics is facing an uphill battle to secure demand, scale its operations and achieve profitability. The company is burdened with technology that is unproven at scale, unprofitable unit economics, manufacturing costs well above industry peers, and intense competition from more commercially advanced operators. Serve's claims of partnerships with Uber (UBER) and Nvidia (NVDA) may appear promising on the surface, but we do not believe that these strategic investors are meaningfully invested in the success of the business. Significant capital infusions and shareholder dilution seem inevitable in the near-term. With no clear good path forward, we view Serve as a speculative investment with a high probability of losses. Business model is promising but not there yet Serve Robotics operates a hardware-as-a-service model, providing autonomous robots to handle last-mile deliveries for its clients, like Uber. The company earns revenue by charging clients for the use of its robots. In theory, the business model aims to reduce delivery costs by replacing human couriers with robots, which should be less fallible and cheaper over an extended period. However, this model is heavily reliant on technology that is still in its infancy and unproven at scale. The current cost of building and maintaining these robots, coupled with the need for constant human supervision and even frequent physical intervention, undermine the promise of cost savings. Additionally, Serve's success hinges on its ability to rapidly scale production to reduce unit costs, and optimizing robot performance, but it is competing with larger and more mature rivals in what we view as a commoditized space. We elaborate on these points further below. Uber and Nvidia investments are meaningless Serve Robotics describes Uber and Nvidia as \"technical partners\", and also regularly boasts of the fact that these two prominent companies are minority shareholders of SERV. We see this fact often touted as a source of confidence in the stock's value, particularly in the retail investor community. In reality, Uber and Nvidia are respectively a client and a supplier of SERV, not a true partner in any meaningful sense. Both Uber and Nvidia have dozens of investments, but as strategic investors, they are not returns-oriented. They invest based on a loosely defined \"strategic fit\" and do not approach valuation the same way that a rational financial investor would. Companies like Uber and Nvidia spray small investment amounts across a large number of companies in the off chance that they succeed, and at worst, failures become learning experiences. In the words of an Uber employee: \"We'll be able to learn from both of those pilots what customers actually want, what merchants actually want, and what makes sense for delivery, as we start to integrate our platform with AV companies.\" In other words, outsourcing R&D and field tests to \"partners\" like Serve, spreads the cost, and importantly the risk, with external investors, instead of Uber having to shoulder the entire burden. If it goes well, Uber will implement the solution, capturing the upside and squeezing Serve's margins leveraging its obviously superior negotiating position. If the pilots do not go well and SERV shuts down, it's a drop in the ocean for Uber, but will still serve to extract some helpful data. Uber acquired its stake in Serve when it bought Postmates, so it did not even truly invest directly in the business. Within the universe of Uber's partnerships, Serve is also just not that special. Uber is also a partner of Aurora in the freight space, having invested $200 million in the company, and a partner of Motional for robotaxis. More directly relevant for Serve, Uber is simultaneously working with Coco, a direct competitor, but with 10x the scale (fleet of 1,000 robots). As for Nvidia's stake, it is public knowledge that they are flush with cash, and according to Pitchbook, the company has made 178 investments in total. Nvidia's stake is worth less than $4 million, but it was not even an equity investment - it was debt which converted to shares. Again, Serve is a drop in the ocean for Nvidia. Neither Uber nor Nvidia are meaningfully invested in the success of SERV, and their respective stakes should not offer investors any reassurance as to the quality of the business. Technology remains unproven at large scale Despite the large numbers of completed deliveries quoted by various operators, this technology remains far from mature. For instance, Serve robots actually still require \"safety operators\" to monitor them at all times and help with complex situations like crossing the street. Starship customers report spilled drinks, wrong orders, and robots getting stuck when it rains. Vandalism also remains a very real threat, in any geography. The track record of robot delivery is a vast graveyard, full of pivots, lay-offs, and discontinuations. Companies like Domino's with Nuro, Kroger with Gatik, FedEx, Alphabet with Wing, and Amazon with Scout are a few examples that have tried their luck in robot delivery, and generally failed. Nuro, which raised $2.13 billion, laid off 30% of its workforce in 2023, and pivoted on to better things. Kroger is still going with Gatik, but in middle-mile delivery, a different segment altogether. FedEx shut down its robot delivery program in 2022. A pilot of Google's Wing in Australia faced fierce opposition from locals and was shut down. Starship continues burning cash, raising another $90 million this year. Amazon Scout was cancelled in 2022, never having evolved past the need to have each robot escorted by a human \"Amazon Scout Ambassador.\" Robots in the restaurant industry more broadly have struggled to mature beyond gimmicks, like Softbank's Pepper fiasco, discontinued in 2021. There is nothing special about Serve Even if you are a fervent believer in the robot delivery market, there is no particular reason why Serve should be the winner. From a technology perspective, there is no clear differentiation between the various players - several companies are developing delivery robots of a comparable size, similar appearance and similar autonomous software with the same limitations. Cost-wise, Serve appears to be at a massive disadvantage compared to its peers. Back in 2018, Starship's manufacturing cost per robot stood at $5,500 with the aim of eventually getting it down to $2,250. Compare that with Serve's $63,654 in 2023 (page 141). The gap to bridge is massive. Commercially, Starship is also far more advanced. Serve counts with 100 robots and \"tens of thousands\" of completed deliveries. Starship hit 50,000 deliveries back in 2019, and is already at 6 million. In addition to Starship, there is a constellation of emerging players such as Ottonomy, Kiwibot, and Coco. Barring certain nuances in positioning and end-market focus, they are virtually indistinguishable. We believe that Serve and its peers will be soon transitioning from a \"deep tech\" positioning to a completely commoditized business. Manufacturing will be delegated to offshore OEMs for cost efficiency, software of all the main players will be largely equivalent as they all improve incrementally with similar data and similar underlying engines, and delivery platforms will force robot companies to compete with each other and with human drivers. The delivery robot companies do not control the manufacturing, they have no consumer brand and do not own the end-client relationship, and they have no truly distinct IP. Viable unit economics remain a distant mirage Serve is targeting a cost per delivery of $1, but we do not see this as a feasible target. According to Serve, food delivery robots can operate a maximum of up to 20 to 30 deliveries per 12-hour \"day\", or around 2.1 per hour. At present, reality is closer to 0.4-0.6 deliveries per hour, translating into about 2,190 deliveries per robot per year, or 10,950 deliveries throughout a robot's assumed useful life of 5 years. At current manufacturing costs, the hardware cost alone is about $5.81 per delivery. Optimization of robots' deliveries per hour to the maximum of 2.1 would have a massive impact, bringing hardware costs per delivery down to $1.38. However, this excludes any downtime and maintenance costs, as well as the costs of remote supervision (20% of journeys) and the occasional physical assistance that robots require (1 in 500 orders). Looking at the company's cost of deliveries (using cost of revenue as a proxy) for the last 2 years and dividing that by 50,000 total deliveries returns an average cost of $57.57 per delivery. Let us assume that steady-state total cost per delivery will be split 50/50 between hardware and other costs. Achieving $1 total cost per delivery would then require (i) a 320% increase in robot productivity measured in orders per hours; (ii) a 64% decrease from current production costs per robot; and (iii) a 99% decrease in other costs per delivery. These are extremely ambitious targets and cannot be achieved merely with economies of scale. Increasing productivity and decreasing costs per delivery (including the level of human involvement, which is a key cost driver) are fundamentally technological challenges which stand unresolved across the industry. No path to profitability without substantial dilution Serve Robotics has raised a total of $169 million to date, according to Pitchbook. As of Q2 2024, the company had $29 million in cash, and it is burning around $6 million per quarter in operations alone, while quarterly revenue is less than $500k. Even without any capital expenditure, we expect that the company will seek additional external funding within the next 12 months. There are no signs of a clear acceleration in commercial take-up that would change the company's current trajectory. Even if there was a sudden spike in demand, the company does not currently have the necessary structure to fulfil it, nor the capital to acquire said structure. The company does not expect to build and deploy any more robots with the current level of capital. Since Serve went public via a merger with Patricia Acquisition Corp. in August 2023, the number of shares outstanding has already increased a whopping 60%, from around 25 million to almost 40 million shares in total. Occasional share placements at a discount to market price are the only way for the company to continue funding itself, and we believe these will continue to happen in the foreseeable future, increasing the negative pressure on the share price. Limited potential positive catalysts on the horizon The main risk to our bearish thesis is an acquisition of Serve by a customer or competitor. The most obvious suitor would be Uber, but as explained above, we do not see Serve as sufficiently strategic or mission-critical to warrant a takeover, particularly as Uber is increasingly cost-conscious and therefore likely not willing to place risky bets on moonshots the way it used to. Other potential buyers could be competitors like Starship or Kiwibot, the latter having a track record of acquisitions (Nickelytics, AUTO) albeit at a smaller scale. Neither can afford to buy Serve at its current valuation. Setting aside M&A and considering the business itself, we do not believe that there are sufficiently material commercial catalysts that could possibly mitigate the scale of the dilution required to start delivering any kind of meaningful sales volume. There could be positive news flow in the form of a big order from Uber, a partnership with Deliveroo or a similar announcement, but we believe that such demand most likely could not be fulfilled with the current level of capital. Considerable risk, high probability of dilution  Serve Robotics presents itself as a high-tech solution to the logistical challenges of last-mile delivery, but reality is far less rosy. With a business model constrained by prohibitive costs, technology that is unproven at scale, and strong competition, Serve faces an uphill battle to achieve profitability. The company's reliance on continued equity dilution, coupled with uncertain commercial take-up, makes it a highly speculative investment. The backing of Uber and Nvidia, often highlighted as a vote of confidence, is, in fact, superficial and does little to mitigate the broader risks. Investors should be wary of the hype surrounding autonomous delivery and approach Serve Robotics with caution, as the likelihood of losses remains high.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"-1","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"hasMoreComments":false,"newsSizeData":{"likeSize":1,"commentSize":0,"repostSize":1,"favoriteSize":1,"likeStatus":false,"favoriteStatus":false}}