Up 307% in a Month, Should You Grab This Breakout Stock Under $20?

Serve Robotics (SERV), a breakout stock that has captured the market’s attention with a staggering 307% surge since news broke of Nvidia's (NVDA) investment in the company in mid-July, is making waves in the technology and delivery sectors. The company, which specializes in autonomous delivery robots, recently expanded its reach by securing a high-profile partnership with Shake Shack (SHAK). This new partnership underscores Serve Robotics’ potential to revolutionize last-mile delivery, particularly in urban areas where its artificial intelligence (AI)-powered, low-emission robots are poised to reduce noise and congestion.

Despite this meteoric rise, the stock has pulled back from its highs, highlighting the inherent risks associated with such rapid growth. While Serve Robotics offers a compelling narrative of innovation and market disruption, it’s important to note that only one analyst currently covers the stock, giving it a “Strong Buy” rating. This limited coverage suggests that while the company’s prospects are intriguing, the investment remains high-risk.

In this article, we’ll explore the underlying factors that could influence SERV’s trajectory, helping investors decide if it’s time to grab this breakout stock or proceed with caution.

About Serve Robotics Stock

Serve Robotics (SERV) originated as a spin-off from Postmates, a food delivery service acquired by Uber Technologies (UBER) in 2020. With a market capitalization of about $397 million, Serve Robotics specializes in the development of advanced, AI-powered, low-emission sidewalk delivery robots. The company primarily targets last-mile food delivery in cities, working with enterprise partners like Uber Eats and 7-Eleven. Since its spinoff in 2021, Serve has successfully executed tens of thousands of deliveries for its enterprise partners.

Serve Robotics shares are up by 307% from their close on July 18, just before investors learned of Nvidia's investment in the robotics company. However, SERV is down by 55% from its July 30 highs.

Market Bellwether Nvidia Invests $3.7 Million in Serve Robotics 

On July 19, Serve Robotics shares spiked about 187% after semiconductor giant Nvidia revealed that it owns a 10% stake in the company. According to the filing, Nvidia acquired 1.05 million shares on April 22 at a price of $2.42 each, bringing the total acquisition cost to just over $3.7 million. The purchase stemmed from a 6% Convertible Promissory Note held by Nvidia.

Notably, Nvidia owns 3,727,033 shares out of Serve’s total of 37.1 million outstanding shares. In its August 2024 investor presentation, Serve Robotics indicated that Nvidia has been its technical partner since 2018.

Serve Robotics Shares Surge on New Partnership with Shake Shack

On Aug. 14, Serve Robotics shares climbed over 9% following the announcement of a partnership with Shake Shack to use Serve’s autonomous delivery robots for deliveries through Uber Eats, the delivery arm of Uber Technologies. Serve Robotics stated that the all-electric, AI-powered robots, resembling boxes on wheels, are equipped with advanced GPS technology and are designed to reduce noise and congestion in crowded urban areas.

Customers ordering from certain Shake Shack restaurants in Los Angeles through Uber Eats might have their meals delivered by Serve’s innovative autonomous robots. This partnership represents a further expansion of sidewalk robots on Uber Eats, having already provided Serve’s autonomous deliveries in Los Angeles since 2022, and is set to facilitate broader expansion throughout the U.S.

“We are excited to add another national merchant like Shake Shack to our platform, a partnership made possible through the relationship we have built with Uber Eats across tens of thousands of successful deliveries,” said Touraj Parang, President and COO of Serve Robotics. “Today’s announcement highlights the value of Serve’s world-class strategic partnerships as we work to expand our geographic footprint and deploy 2,000 robots across the U.S. in 2025.”

How Did Serve Robotics Perform in Q2?

Serve Robotics reported its financial results for the second quarter of fiscal 2024 on Aug. 13. In Q2, the company’s total revenue surged by 655% year-over-year to $0.468 million, driven mainly by $0.30 million in revenue from its software services contract with Magna (MGA). It should be noted that Serve substantially completed its services contract with Magna in the second quarter, and the company does not expect significant software services revenue in the third quarter. Management anticipates that over the long term, the primary sources of revenue will be from the Delivery and Branding segments. In the second quarter, the company’s delivery and branding revenues reached $0.17 million, up from $0.06 million in the same period last year. SERV posted GAAP EPS of -$0.27 for the quarter, missing Wall Street’s expectations by $0.02.

The company had 48 operational delivery robots in the second quarter, clocking 385 supply hours on a daily basis. During the Q2 earnings call, Serve’s management said that forming more partnerships would increase the number of active service robots and boost revenue. The company aims to expand its Los Angeles network by adding 250 robots by the first quarter of 2025. The goal is for each robot to generate approximately $35,000 in annual revenues. As a result, deploying 250 robots is expected to generate approximately $8.75 million in annual revenues when fully optimized within 6 to 12 months of commencing deliveries.

Moreover, Serve Robotics aims to deploy 2,000 robots by the end of 2025, expanding into a new market - potentially San Diego, Dallas, or Vancouver. The total number of robots operating for Uber Eats is expected to generate run rate revenues between $60 million and $80 million.

Serve Robotics secured $40 million from its initial public offering and garnered an additional $15 million through a private placement in July. Following the private placement, the company’s cash balance reached approximately $43 million, with a cash burn rate of $9.8 million in the first half of 2024, averaging about $5.0 million per quarter. As a result, share dilution is not expected in the near future.

SERV Stock Valuation and Analysts’ Estimates

The sole analyst tracking Serve Robotics forecasts that the company will register a loss of $0.85 per share in fiscal 2024, and expects the loss to narrow to $0.51 per share in fiscal 2025. SERV’s revenue is expected to reach $1.64 million in fiscal 2024, with a dramatic 877.40% increase year-over-year to $16.00 million expected in fiscal 2025.

Assessing SERV’s valuation, the company’s forward EV/Sales ratio stands at 253.57x, markedly higher than the sector median of 1.20x, suggesting that SERV stock is significantly overvalued. However, if Serve Robotics expands its robot fleet and achieves higher revenues, demonstrating triple-digit quarterly revenue growth, this premium valuation might become justified.

Options Market Sentiment on Serve Robotics Stock

Looking at the option chain for September 20, 2024, the $10.50 call option has a bid/ask spread of $1.40/$2.00, and the $10.50 put option shows an extremely wide spread of $0.85/$2.25. Remember, this options strike is closest to the current stock price. We can define the expected price movement by using the midpoint prices of these options:

1.55 (10.50 put) + 1.70 (10.50 call) = 3.25/10.71 = 30%

According to current prices, the options market suggests that SERV stock might see a fluctuation of about 30% by the September options expiration from the $10.50 strike price, using the long straddle strategy. That would place the stock in a trading range of about $7.49 to $13.92. 

Notably, at the $10.50 strike price, open puts outnumber open calls by approximately three to one, with 36 open puts versus 13 open calls. While open interest is very light, this suggests a bearish sentiment in the options market.

What Do Analysts Expect For SERV Stock?

Serve Robotics is covered by a single analyst at Aegis, with a “Strong Buy” rating and a price target of $16. That indicates expected upside of 49.4% from current levels.

The Bottom Line on SERV Stock

Taking everything into account, I recommend that investors steer clear of SERV stock at this time. While the company’s Q2 results and a partnership with Shake Shack seemed promising, it’s important to recognize that the end of software revenues from Magna will result in very limited revenue in Q3 and Q4. This is likely to exert short-term downward pressure on its shares. Moreover, the company must take further steps to justify its high valuation.