3 Reasons to Be Cautious About Serve Robotics

Anand Chokkavelu: Welcome, latest Motley Fool scoreboard. I'm Anand Chokkavelu. We've got longtime fools, Travis Hoium and Jason Hall, giving a 1-10 rating to Moneyball Rec, Serve Robotics ticker symbol S-E-R-V at the strength of Serve's business first, including factors like industry and competition. Ten's invincible, one's hopeless. Starting out well. Jason's at a 3, Travis, you're the bull here at a 4. Travis Hoium: Yes how did I take the bowl role here with a four? Serve Robotics, got these little carts that roll around and deliver food burrito carts, if you will. Really cool tech. I don't discount that at all, but this is one of these companies where there's a difference between cool technology and making a real business. That's the struggle that I have with a stock like Serve Robotics. It has been one of those favorites of investors for a long time, but they've never shown that they can generate even real revenue, much less profitability. I think it's one of those things that's a better feature than it is a product or platform or a standalone business. Maybe it should have just stayed under Uber, which is where it started. Jason Hall: You say, come on, revenue is up 251% over the past year. Great. You're still cost playing as a business. You did $5.4 million in revenue, burned 114 million in operating cash. This is still a startup. I think it's a really interesting idea, but we just don't know if there's going to be any competitive advantages that lead to operating leverage and positive cash flows at this point. Anand Chokkavelu: For management, a 10 is Warren Buffett, a 1 is Homer Simpson. Higher scores here. Jason's at a 7, Travis here at a 6. Travis Hoium: You got to give credit for building technology that I think is really cool and cool and potentially valuable. But that's ultimately not what we're buying here. Again, management is always a little bit hard to judge in these cases because their first job is to build a product that people want to use. I think they've done that, but they have not shown the ability to actually build a real business. Jason Hall: If you're judging by stock performance, this would be a one. Investors have lost money since it was announced Serve would be publicly traded. You look back a little bit here, you've got, I think three co-founders, including the CEO who's had success as a serial entrepreneur, building businesses, selling them, making investors money. But I'm not sure we're at that point with Serve. I'm giving them credit for a great idea at this point. Whether retail investors should be investing with this team is still a little bit TBD. Anand Chokkavelu: For financials, a 10 is a fortress, the 1 is Yikes. Back down to those lower scores. Jason's at a 4, Travis here at a 3. Travis Hoium: Yes, negative $147.5 million in free cash flow over the past year. Here's the other challenge. Only $167 million worth of cash on the balance sheet. The challenge is when are you going to run out of cash. That means that they're going to have to probably sell stock to loot shareholders even further. It's challenges all around from a financial perspective, and that's just not the place that I want to be as an investor. Jason Hall: Business could 10X its revenue over the next year, and it would still only be halfway to getting just a free cash flow neutral on an operating basis. There's a ton that has to be done. It's still negative just even gross margin, so it's having to pull out of its coffers just to cover the cost that it's not getting from its partners to cover the cost to manufacturers machines. By any metric, there is a ton to prove before the financial profile is sustainable, and that's before we talk about the balance sheet where the company is going to have to do some secondary to raise more money in the next probably year. Just a lot of things investors have got to be concerned about right now. Anand Chokkavelu: All right Jason. Let's talk valuation. How will Serve Robotics docked over the next five years? How safe is it? Ten's a sure thing. One's a lottery ticket. Jason Hall: This is a binary outcome stock. I think 95% probability one of two things is going to happen. Investors are either going to make money or investors are going to lose money. I don't think there's a very high likelihood case that you pay $9.5 for the stock, and five years from now, it's still trading around $9.5. It's either going to be a lot less, it's going to be gone, or it's going to be a $90 stock. It's one of those two things. My safety score is a 2. I'm giving management a little bit of credit that there is there there. They've got a couple thousand of these things out there. They've got thousands and thousands of delivery partners that are on the app for those machines. This could be a huge winner. I just think that the probabilities are probably higher that it's a loser. Travis Hoium: I'm going to actually say it's 100% chance investors are either going to make money or lose money. But [LAUGHTER] I will agree the outcomes are really binary. Jason Hall: There's a 5% chance that somebody's going to buy them for the same price. Travis Hoium: [OVERLAPPING] For the exact price trading for today. Anand Chokkavelu: The green spots on the roulette wheel, Travis. Jason Hall: There you go. [LAUGHTER] Travis Hoium: I think you got to have really low expectations, and that's why this just isn't a stock. I'm all that interested in right now. Possible that they do get acquired and get rolled into somebody else. But that's really rolling the dice, especially at this point, I think the more likely outcome is that somebody buys them out of bankruptcy or some restructuring and buys the technology, maybe buys the operations that they have, but you're not going to get a lot of value out of that. Safety score is really low. Anand Chokkavelu: That guys showed how binary it is. One of you picked the less than zero. One of you pick the greater than 15. Together, it makes sense. Thank you to both Travis and to Jason. They've given Serve Robotics a low overall score. As you could probably guess, 4.3 out of 10. For topics, Travis prefers Uber. Jason prefers Amazon for its delivery and logistics operations. Look out for a new Scoreboard every market day at 7:00 PM Eastern. Next up is Consolidated Edison. Till then, Fool on.