AutoStore

Since going public in 2021, AutoStore has failed to live up to high expectations. While the shares still command a growth stock multiple, one key question for investors is whether this is justified by the sales trajectory.

AutoStore published their 2023 annual report at the same time as the Q1 24 report on April 25th. Our system identified a number of new red flags associated with these new filings, which might cause investors to take a closer look at revenue expectations. The new CEO, Mats Holvand Vikse, was promoted internally from his previous role as Chief Revenue Officer. This type of profile is often associated with a more aggressive approach to revenue generation — an approach that can, on occasion, spill over into the accounting department…

The key flag, picked up from the annual report, is a change in accounting policy related to revenue recognition. Below we compare the wording from the 2022 annual report to the 2023 annual report (our own emphasis is added in bold).

In 2022:

“Revenue from components of the AutoStore system is recognized at a point in time when the components are delivered to the distributor”

In 2023:

“Revenue from components of the AutoStore system is recognized at a point in time when the distributor obtains control over the components, which is generally upon shipment.”

The change in wording suggests that AutoStore may be recognizing revenue from components at an earlier point in time — when the products are shipped rather than when they are delivered. This change may have inflated revenues in 2023 and resulted in an artificially high growth rate.

You might expect earlier recognition of a sale to result in a reduction of inventory as it shifts from the balance sheet faster. However our system also identified a new flag related to increased DSI in Q1 24. The filings show that Inventory has risen from $80.4m in Q1 23 to $92.9m in Q1 24 (with most of this increase happening in the recent quarter). Over the same period, the “Cost of Materials” has fallen sharply, from $49.1m to $37.6m. According to the company this was due to a favourable mix shift towards software sales and favorable sourcing of raw materials. Based on these figures, DSI has increased over 50% YoY from 149 days to 225 days (see extract from our report below). This now represents over 7 months of sales.

Note that since AutoStore’s systems are sold via distributors, there may also be a level of inventory held on the balance sheet of distributors. Combined with inventory in transit, this creates a risk of excess inventory through the channel, and potentially a period of consolidation if end customer demand slows.

As an aside, we also note that some contracts provide distributors with a “retrospective customer bonus”, giving rise to variable compensation. The company recognizes a “rebate liability” for the portion of compensation it expects to be returned to the distributor. While rebate liabilities have been created (and used) in all previous years since 2019, this year there was no such rebate liability in 2023. This may be to do with the structure of contracts, but is also consistent with a less conservative approach to revenue recognition.