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Graze Is a High-Risk, High-Reward Play for Private Investors

Graze is a high-risk, high-reward play on SeedInvest, with upside potential of 1,000%-plus

[Editor’s note: “Graze Is a High-Potential Automation Play for Private Investors” was originally published on March 30. It has since been updated to reflect more recent developments.]

Source: rudall30 / Shutterstock.com

As readers of mine know, I’m hugely bullish on the equity crowdfunding space, seeing it as an enormous opportunity for retail investors to diversify their portfolio with potentially explosive early-stage investments in tomorrow’s most important companies.

With that in mind, one of the more interesting private investments that I’ve come across on crowdfunding platform SeedInvest is robotic commercial lawnmower maker, Graze.

In short, Graze is a pre-revenue company that has developed a fully-autonomous, robotic commercial lawnmower. Management believes this breakthrough technology has the power to disrupt the $54 billion U.S. commercial landscaping market, by addressing and eliminating the market’s biggest pain-points: labor costs, fuel costs, safety-related workers compensation and pollution.

Those pain-points are painful enough — and the benefits of Graze’s solutions clear enough — that I do believe this company has a good opportunity to become a meaningfully large player in the U.S. commercial landscaping market. If so, an investment in Graze today could yield huge returns.

Graze’s current financing round on SeedInvest values the company at $23 million (pre-money). My modeling suggests that a $1 billion valuation is possible within the next decade. That represents several thousand percent return.

To be sure, an investment in Graze comes with huge risks. After all, the company is pre-revenue. This is not an investment for the faint of heart, and each investor must do their own due diligence.

Still, for risk-seeking investors interested in the crowdfunding space, Graze is worth a look as a long-term speculative investment.

A Necessary Breakthrough Solution

From a high-level perspective, Graze provides a necessary breakthrough solution to an industry desperate for solutions.

The commercial lawn-mowing market has a few big challenges. Those challenges include:

  1. High labor costs. Because almost anyone can ride a mower and do an acceptable job — and because commercial landscapers continuously underbid one another to win services — mowing is one of the lowest margin services in the landscape world, with labor accounting for 45% of gross revenue.
  2. Big fuel costs. Mowers consume about 1.2 billion gallons of gasoline annually, and commercial mowing consumes more than 100 million gallons of diesel annually. All those gallons equate to huge fuel costs.
  3. Significant safety-related risks and costs. Lawn-mowing, while not terribly dangerous, isn’t the safest job in the world, either. Accidents happen, and accidents cost money. For example, Graze cites one of its potential clients as having roughly $100,000 in safety-related workers comp payouts in 2018.
  4. Too much pollution. Lawnmowers, much like gas-powered cars, are major contributors to pollution and global warming. Multiple studies confirm this.

Graze’s fully autonomous, electric lawnmowers address and eliminate all of these pain-points. The mower reduces a 4-man landscaping team, to a one mower and 2-man landscaping team, resulting in 50% labor savings. Fuel costs come down to zero. Safety costs come down to zero. Pollution concerns are eliminated.

In other words, Graze’s mowers have the potential to cut significant costs out of the traditional landscaping model, and significantly boost landscaper profit margins. For example, Graze estimates that its mowers could increase one client’s operating profit margins from 6% to 43%.

An Attractive Business Model

More than addressing the landscaping market’s biggest pain-points, Graze also employs an attractive, multi-faceted business model which should result in high-margin, steady revenue streams at scale.

That is, Graze is both a hardware and a software company. On one side, they sell the robotic lawnmower for $30,000 per mower. On the other side, they sell a software service at $1,000 per month per mower. That service is necessary to keep the mower up-to-date and functioning.

Over the course of five years, then, each mower Graze sells will net the company $90,000 in revenue, $60,000 of which is high-margin, annually recurring software revenue.

At scale, this should result in significantly higher gross margins that pure-play hardware companies, as well as much more revenue visibility and stability.

Some Early Stage Visibility

As stated earlier, one of the major risks with Graze is that the company hasn’t actually sold any lawnmowers yet, because the product is still in development mode.

But, the company has two signed Letters of Intent (LOIs) which help mitigate this pre-revenue risk.

Specifically, Graze has signed LOIs from LandCare and Mainscape, two of the top fifteen commercial landscaping companies in the U.S. The LOIs are for the purchase of 400 lawnmowers, the first of which Graze expects to ship out in 2020.

Looking out further, these two landscaping companies alone have about 1,400 lawnmowers across the country. Assuming the first shipments of Graze mowers at each company are well received, then presumably both companies will proceed to replace all of their lawnmowers with Graze mowers over the next several years.

In a five year window, that would represent a $126 million gross revenue opportunity for Graze. Visibility towards this opportunity is sufficient enough to compromise for pre-revenue risks.

A Huge Opportunity Ahead

In the big picture, Graze has a huge opportunity ahead of it.

Estimates are tough to find, but there are about 13 million commercial lawnmowers in the U.S. Annual sales volumes hover around 300,000 units.

Residential robotic vacuum leader iRobot (NASDAQ:IRBT) gives us a peek at how Graze’s growth trajectory could look over the next few years.

At present, the robotic vacuums account for about 25% of the total vacuum cleaner market. In that robotic market, iRobot owns about 50% share. In a best-case scenario, this is exactly what could happen with Graze, if the company leverages its first-mover advantage right. In a decade, a quarter of commercial lawnmowers across the U.S. could be robotic lawnmowers, and Graze could own half of that market.

Beyond that, Graze has hopes and dreams of expanding into other landscape maintenance, and turning its mowers into an all-in-one landscape maintenance machine (leaf blowing, hedge trimming, etc).

Still, at this stage, estimates along these lines seem aggressive.

Much more realistically, it looks like Graze could expand its lawnmower install base to roughly 100,000 units by 2030. Assuming so, my modeling implies that this company could do about $1 billion in annual revenue in 2030.

Further assuming the company operates at iRobot-like gross margins (~50%) and opex rates (~40%), then Graze could be looking at $100 million in operating profits, or about $80 million after taxes. Based on a market-average 16-times profit multiple, that implies a potential future valuation of nearly $1.3 billion — versus today’s $23 million pre-money valuation.

Risks Are Big, Too

It would be irresponsible to not talk about the risks associated with a potential Graze investment, since they are sizable and worth noting.

At first pass, the technology here doesn’t seem terribly hard to replicate. It’s largely low-level labor automation. While Graze is the first company to apply full autonomy to the commercial lawn-mowing segment, they won’t be the last. Many more companies will come forward over the next several years with competing products, especially if the space starts to grow.

Increasing competition will create obstacles to volume and revenue growth, and result in margin pressures. Simply look at iRobot for proof of this. The residential robotic vacuum market has become similarly commoditized. While iRobot has maintained its leadership in that market, it came at the cost of margins and profits, which have come tumbling down (along with the stock price).

Graze could find itself in a similar position if this market scales similarly to the robotic vacuum cleaner market.

Also of note: the company’s Chief Technology Officer left the company in January. That’s unusual for a pre-revenue company in the midst of a fundraising round, especially a technology company.

Bottom Line on Graze

Graze is high-risk, high-reward play on automation in the commercial landscaping market. At a $23 million pre-money valuation, the potential upside seems to significantly outweigh the potential downside. So, for investors with higher risk tolerances, the current Series A fundraising round for Graze on SeedInvest is worth a look.

Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities.

Investing through equity and real estate crowdfunding or asset tokenization requires a high degree of risk tolerance. Despite what individual companies may promise, there’s always the chance of losing a portion, or the entirety, of your investment. These risks include:

1) Greater chance of failure
2) Risk of fraudulent activity
3) Lack of liquidity
4) Economic downturns
5) Dearth of investor education

Read more: Private Investing Risks


Article printed from InvestorPlace Media, https://investorplace.com/2020/07/automation-stock-graze-huge-potential-upside-seedinvest-privinv/.

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