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Investment Thesis
Ah, things looked very promising for a few hours. Richtech Robotics Inc. (NASDAQ:RR) had some good news and the stock price soared, but the stock price quickly fell back to its starting level.
Still, the news suggests there could be some big deals coming in the next year or two that could pay off. Specifically, the company has completed installation of its product in its first of 240 locations, which is a big deal for a small company that only recently began trading on the NASDAQ.
Given this and other news, I am upgrading Richtech from a “Hold” rating to a “Buy.”
About Richtech
As explained in an article on March 28, 2024,
“Most of Richtech’s products are autonomous mobile robots (AMRs), meaning they understand and navigate their environment on their own, without the need for tracks, predefined paths or operator intervention.”
This photo, published in a company news release, shows ADAM, the robot, working in a ghost kitchen at a Walmart (WMT) in Atlanta, Georgia.
The company is looking at markets such as hospitality, which has a chronic labor shortage and growing demand for customer service. Allied Market Research released a study that pegged the industry’s annual growth rate at 15.2% through 2032. Mordor Intelligence projected the market to grow at 17.10% annually from 2024 to 2029.
Richtech news that (temporarily) moved the stock price
RichTech completed installation of ADAM on June 13, 2024, according to a company news release issued before the market opened on Monday, July 22.
Just a few days ago, it was announced that ADAM would be performing at Major League Baseball’s annual All-Star Game in Arlington, Texas.
Some investors, apparently hoping for good news, bought the stock higher on Friday, July 19. The buying continued into Monday morning, but sentiment changed late in the morning and the stock price fell through the afternoon, as shown in the following 5-day price chart:
Data by YCharts
According to a press release, ADAM served a variety of traditional and specialty coffees to customers at a ghost kitchen location in a Walmart in Dawsonville, Georgia. Matt Casella, president of RichTech, said:
“The introduction of ADAM to the beverage industry addresses several key challenges, including the need for consistency, efficiency and a memorable customer experience. By automating drink preparation, ADAM aims to free up human staff to focus on making meaningful connections with guests, improving the overall customer experience.”
The deployment follows a letter of intent from Ghost Kitchens to roll out ADAM across its 240 locations.
Installation and news meaning
Richtech reports on its website that it currently has robots installed in 80 cities across 37 states, and presumably that reach will expand significantly with the addition of 240 more locations through Ghost Kitchens (though some installations will no doubt take place in those 80 cities).
The deal also provides further proof of concept for potential customers on the fence about ordering, and Ghost Kitchens’ partnership with Walmart may give the company more credibility.
While no pricing information was provided, it’s safe to assume the deal will generate significant new revenue and profits over the next few years. RichTech’s business model is based primarily on recurring revenue, and according to a Verdict Food Services article:
“Richtech Robotics will oversee the programming, maintenance and repairs of the ADAM system. Ghost Kitchens will handle location logistics, staff management and leasing.”
Latest Financial Results
The period ending March 31 was RichTech’s second quarter and first half of the fiscal year, with its fiscal year ending Sept. 30. The 10-Q income statement, released May 14, included the following financial details for the three months:
Revenue, cost of sales and gross margin were essentially flat for the quarter. In the expenses section, we saw increases in sales and marketing (a good thing), higher G&A, and interest expense for the first time. These factors contributed to an increase in the net loss compared to the same period last year.
Another factor to note is that the company received a $2 million loan from a third party in the quarter ended March 30. It also issued new common stock in the first quarter, adding capital while diluting the value of existing shares. On a related note, as of the last report, individuals and insiders hold 74.08% of the common stock, with three insiders holding 60.7%.
On the balance sheet, total cash and cash equivalents fell to $8.195 million from $7.535 million as of December 31, 2023, meaning $660,000 in cash was burned during the quarter and $220,000 was burned during the month.
Comment: With two cash injections, Richtech has the liquidity it needs to continue operating for at least the foreseeable future. Cash burn is no longer a factor for investors.
High shareholder ownership of 60.7% means management is aligned with shareholders.
RichTech is currently burdened with debt, and as the income statement shows, the company is currently paying a lot of interest.
growth
I believe the ghost kitchen acquisition will be revenue accretive, but how so is something only insiders know for now. The company has indicated that the deal will include recurring revenue. It has not said how much revenue it expects or when it will arrive, but we may have some data when it files its next quarterly report, likely in mid-August.
Neither the letter of intent from last January nor the news release about the installation explained whether the ghost kitchens would be purchased, rented, leased or otherwise. My concern is that if Richtech were to offer them on a lease or rental basis, it would need to use capital or borrow to cover the construction costs per ADAM unit.
On the other hand, if Ghost were to buy the robot when it’s installed and pay periodic maintenance fees, RichTech’s cash flow would be much stronger.
Overall industry growth is expected to be solid, so RichTech should fare well as long as it can expand without burning through cash.
evaluation
Richtech shares began trading optimistically on November 17, 2023.
Data by YCharts
As you can see, the price spiked on Friday, July 19 and Monday, July 22, but the increase was not sustainable. By Monday’s close and on Tuesday, July 23, it was below its opening price from the previous Thursday. Tuesday’s closing price was $1.17, down $0.20, or 14.60%.
This appears to have been another case of the market becoming overbought and then oversold and unable to find a middle ground where it could take in some good news without turning it into a frenzy.
So far, pricing is necessarily speculative: management has not provided any guidance or outlook in either the 10-K or 10-Q, so there are no revenue projections, let alone earnings forecasts, to guide valuation.
However, I am upgrading my rating from Hold to Buy, based on the expectation that the ghost kitchen deal will make a significant difference to future performance. Beyond the tangible numbers, there is intangible value in being selected by a Walmart affiliate for a large order of 240 robots.
Risk factor
Going public allows companies like RichTech to raise resources from the capital markets and accelerate growth. But translating promises into bottom-line results often takes longer than expected. The Ghost Kitchens deal may be an example of that. I’m very positive, but investors may need to be patient.
The company noted in its Q2 2024 report that its performance is “intrinsically tied to global business and economic conditions.” This makes sense, as issues like interest rates and economic conditions will cause the prices of these robots to fall and rise.
Competition in this industry is intense and news of Richtech’s deal is likely to attract even more players to the market. As we discussed in our previous article, there are already some strong competitors in this market.
With many robot delivery companies competing with each other on technology, inventors in the basements and R&D departments of large corporations may come up with disruptive new products. Similarly, potential customers may see this competition and drive down their prices.
Although the company has been in business since 2016, it is still a relatively new public company and has yet to post a profitable financial result, meaning investors have little choice but to speculate in order to set a reasonable entry price.
Conclusion
RichTech Robotics got a big boost when it deployed the first of 240 robots for ghost kitchens, which boosted its stock price briefly, but the gains were not sustainable and the stock fell back to pre-spike levels.
But what’s more important is whether this transaction puts the company on a path to profitable growth and ultimately returns for shareholders. There’s not enough information yet from the letter of intent or the news release about the placement to make a reasonable prediction. But the deal does send a signal that the company is on solid ground and poised to become a big company.
Accordingly, we have updated our rating on Richtech Robotics Inc. from “Hold” to “Buy.”
Editor’s Note: This article features one or more microcap stocks. Please be aware of the risks associated with these stocks.