Rising Regulatory Risks And Partner Dependence Will Challenge Autonomous Delivery Adoption Yet Ultimately Strengthen Prospects

Catalysts

About Serve Robotics

Serve Robotics develops and operates autonomous sidewalk robots that provide last mile delivery services for restaurants, platforms and urban communities.

What are the underlying business or industry changes driving this perspective?

• Although partnerships with major delivery platforms like Uber and DoorDash could unlock substantially higher order volume and robot utilization, the company must still prove that these integrations can scale without eroding pricing power or overextending service commitments. This will be critical to sustaining revenue growth and protecting unit economics.
• While broader adoption of online and on demand ordering offers a long runway for transaction growth, merchants may pressure Serve to pass most of the efficiency gains through in the form of lower delivery costs. This could limit future improvements in gross margin even as delivery volumes expand.
• Although advances in physical AI and the integration of Vayu promise higher autonomy, faster speeds and lower supervision costs per mile, the high and rising R&D spend required to keep pace with rapid AI and hardware innovation could delay the timeline to positive earnings and constrain operating margin improvement.
• While cities are increasingly seeking quieter, cleaner and less congested streets that favor compact electric delivery robots, tighter municipal regulations, permitting hurdles and neighborhood resistance could slow market launches and reduce the pace at which new territories translate into meaningful revenue contribution.
• Although scaling the fleet from 1,000 robots toward 2,000 and beyond should create powerful data flywheel effects that improve reliability and utilization, continued high CapEx needs for manufacturing, deployment infrastructure and maintenance could keep free cash flow negative for longer than expected, even if headline revenue grows rapidly.

Assumptions

This narrative explores a more pessimistic perspective on Serve Robotics compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Serve Robotics's revenue will grow by 266.0% annually over the next 3 years.
• The bearish analysts are not forecasting that Serve Robotics will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Serve Robotics's profit margin will increase from -4124.9% to the average US Hospitality industry of 8.1% in 3 years.
• If Serve Robotics's profit margin were to converge on the industry average, you could expect earnings to reach $7.7 million (and earnings per share of $0.08) by about December 2028, up from $-80.2 million today.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 225.7x on those 2028 earnings, up from -11.3x today. This future PE is greater than the current PE for the US Hospitality industry at 24.6x.
• The bearish analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.29%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Despite strong secular growth in online and on demand ordering, Serve is still at a very early revenue base of $687,000 in the quarter and guiding to only $2.5 million for 2025. Any slowdown in adoption by restaurants or platforms could leave the rapidly expanding robot fleet underutilized and constrain revenue growth and operating leverage over time, pressuring revenue and earnings growth.
• The company is pursuing an aggressive expansion strategy toward 2,000 robots and ultimately 1 million units, supported by heavy CapEx of $11 million this quarter and GAAP operating expenses of $30.4 million. If physical AI improvements and Vayu integration do not translate into sufficient cost efficiencies, persistently high cash burn could force dilutive equity raises and delay a path to sustainable net margins and positive earnings.
• Serve’s model is heavily dependent on a few very large platform partners such as Uber and DoorDash that control over 80% of the U.S. food delivery market. Changes in partner strategy, tougher pricing negotiations or platform insourcing of autonomy could compress take rates, cap utilization and slow fleet revenue growth, directly impacting revenue and long term operating margins.
• Long term secular tailwinds for cleaner, less congested cities could be offset by tightening municipal regulations, operational restrictions or community pushback as deployment scales from thousands to potentially millions of robots. This would slow city rollouts, reduce addressable routes and limit Serve’s ability to reach its projected $60 million to $80 million revenue run rate, putting pressure on future revenue and earnings.
• While management emphasizes software, data and Autonomy as a Service as future high margin layers, these monetization channels are still nascent and reliant on successful integration of acquisitions like Vayu and continued AI leadership. If competitors match or surpass Serve’s autonomy capabilities or if customers are slow to pay for these services, the long term margin mix could remain hardware and operations heavy, limiting improvements in gross margin and net margins.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Serve Robotics is $15.0, which represents up to two standard deviations below the consensus price target of $19.2. This valuation is based on what can be assumed as the expectations of Serve Robotics's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $26.0, and the most bearish reporting a price target of just $15.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be $95.3 million, earnings will come to $7.7 million, and it would be trading on a PE ratio of 225.7x, assuming you use a discount rate of 8.3%.
  
• Given the current share price of $12.13, the analyst price target of $15.0 is 19.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.