Description
A2Z Smart Technologies is a cheap call option on the emerging trend toward smart carts in food retailing.
A2Z (ticker "AZ") is an Israeli holding company that owns a few subsidiaries:
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Advanced Automotive Innovations Inc. is an early stage company that is developing a product for the automotive market..the FTICS or Fuel Tank Inertia Capsule System which activates automatically in the event of a vehicle collision
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Maintenance services utilizing the application of advanced engineering capabilities to the Israeli military/security markets and governmental agencies
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Manufacture of Precision Metal Parts
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Cust2Mate (79%). Their product is Smart Carts A brief description of the business is included in the link below:
https://drive.google.com/file/d/1iWsgqUJbzztNx4Gta6rcfBZvLorMfNZW/view
The Company's smart cart has several advantages over self-checkout stations. Cart users can avoid lines for payment and the need to take the groceries out of the cart. Self-checkout does not necessarily avoid lines. The cart allows fruit and vegetables to be weighed in the cart and automatically identifies the item. The cart is also unique with an internal weight scale to prevent errors and theft, components preventing the stealing of the cart itself, navigation capabilities, advertising and various forms of digital payment
Background articles on Smart Carts
https://www.forbes.com/sites/pamdanziger/2023/08/03/smart-carts-may-be-the-disruptive-technology-grocery-stores-need-now/?sh=17d17f7c4588
https://vimeo.com/839846404 Cust2Mate in action at Carrefour
https://cheddar.com/media/ai-helping-to-make-shopping-easier
https://valiantceo.com/major-retailers-reported-increased-theft-during-shrinkage-epidemic-and-looking-for-solutions/
https://risnews.com/diving-consumer-and-grocery-retailer-study-insights-grocerytech
https://www.tahawultech.com/interviews/i-believe-we-will-completely-disrupt-the-global-retail-sector-guy-mordoch-ceo-of-cust2mate/
Why Smart Carts?
Customer Benefits:
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Reduced waiting time
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Personalized Promotions
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Better product info
Retailer Benefits:
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Increased Sales per basket
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More efficient use of space. Fewer checkout aisles needed.
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Data Insights
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Reduced labor costs
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Reduced Theft; 5 layers of protection-Scanner, AI cameras, smart security scale, RFID
Recent Positive Developments for Smart Carts
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Walmart, Wegmans Hyvee and others have dropped scan-and-go given significant shrinkage/theft
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More cars in the field receiving positive customer feedback; it's still early in the deployment cycle but early returns from Israel and European retailers bears evidence of value proposition for Retailers and Consumers
New CEO Guy Mordoch focused on transitioning from R&D to growth stage company and has already made a mark with impressive accomplishments in last 12 months:
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Cart 3.0 will be a lighter model without a scale that will be 60% cheaper to manufacture. The earliest cart design cost $4k and this one gets the cost down to $1k. This will serve customers better as it will be less bulky and the breakeven for the company on the cost to manufacture goes down considerably. In addition, the proposition for the retailer becomes more compelling as Cust2mates model includes revenue sharing and the benefits of higher basket size, lower, shrinkage, footprint cost reduction. A lower cost cart increases cash flow to the retailer as well. Financing options to scale the rollout of carts become more readily available
Thoughts on A2Z valuation:
How about the smart cart division? It is an inherently imprecise analysis but there are some reference points.
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Caper was acquired for $350mm in 2021 by Instacart. They had one pilot in Shoprite. Caper revenue was approximately $5-7mm in 2021 and is buried in the Instacart Enterprise Platform segment which is part of other revenue. Lack of disclosure in the S-1 likely indicates not a lot of growth there. A2Z today has a more advanced product with verified orders and an EV of only $55 million, down from $300mm despite being further advanced commercially and technologically.
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TAM analysis. The global smart shopping cart market was estimated at about $932 million in 2020, with expectations to reach roughly $4 billion by 2026, a CAGR of 27.6%.. A recent study conducted by Anyline suggested that 77% of the 1,500 people they surveyed are more willing to shop at a store that offers scan-and-go (self-checkout).
New business model coming into focus next quarter
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Subscription Model includes an upfront payment, multi-year subscription agreement and monthly subscription fee which includes software updates, support and maintenance. Additional fees for add-on features can be charged, and revenue recognition on a monthly basis allows for steady growth with the installed base of smart carts. Cust2mate has already guided that data and retail-sourced revenues will commence in Q4 of this year
Modeling assumptions:
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AMR
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Carts/Store
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Stores
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Annual Revenue
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|
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|
|
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100
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50
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500
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$ 30,000,000
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|
115
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100
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1000
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$ 138,000,000
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120
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150
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2000
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$ 432,000,000
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|
125
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200
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3000
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$ 900,000,000
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130
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250
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4000
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$ 1,560,000,000
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150
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300
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5000
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$ 2,700,000,000
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Cust2Mate is burning approximately $1mm in cash per month with beefed up staff ahead of the 3.0 cart launch. At the bottom end of the range (25k carts) which represents rollout of only half of the 2 deals already signed they start to make money and in the middle scenarios the business becomes very profitable. Assuming a 50% GM on SAAS revenue and $20mm in annual opex, that translates into fully taxed earnings of $.90/share. It might take a few years but anything approaching that trajectory would create huge upside in the stock. The US has an estimated 63k supermarkets and grocery stores . At an average of 150 carts per store, that implies over 9 million carts for supermarket and grocery alone. Even if we assume a 20% maximum penetration rate given that not all store sizes/types likely qualify for smart carts and a 10% market share for Cust2mate, that would result in a scenario between the second and third above with massive revenue and profit potential. At 1.60 a /share, this is a cheap call option on a potentially enormous market opportunity. A2Z hardly needs to be the winner in the industry to produce massive upside for investors.
Risks
Stalled rollout
Competition takes preponderance of share (Veeve is aligned with Kroger and Albertsons)
Utilization of carts trails off as penetration reaches larger scale
Source: Company reports, SEC filings.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.
Catalyst
Spinoff of non-core subs
Meaningful revenue acceleration from 2 signed deals