Serve Robotics Is Serving Up a Selling Opportunity

Key Points

• Serve Robotics shares are surging on better-than-expected revenue, but investors should expect the price to plunge soon.
• The 30% gain is a knee-jerk reaction to mixed results, compounded by high short interest and short covering.
• The company's losses are mounting, shareholder dilution is significant, and additional dilution is expected.  

Serve Robotics NASDAQ: SERV is up by double-digits following its Q2 release and may continue increasing because of its operational improvements. However, every positive detail is offset by a negative, raising doubts about the stock price trajectory. The market for SERV remains below a critical resistance point in pre-market trading, suggesting the upside is limited. 

The primary causes for concern are the mounting losses, the source of Q2 strength, and the threat of dilution. Among the more troubling details is the company’s assurance that it would need more capital to continue operations, which evokes memories of the EV OEM start-up industry; those companies are plagued by high costs, persistent losses, shareholder dilution, and downwardly trending share prices.

Serve Robotics Pops on Mixed Results: Don’t Chase This Market

Serve Robotics stock price is surging by double-digits on mixed results. The move is most likely a knee-jerk reaction compounded by the high short interest, leaving the market vulnerable to volatility and a return to the recent lows. The company’s revenue is the good news, up by 655% on strength in all three operating segments. However, the strength is centered in the Software Services segments, which brought in nearly $300 million compared to nothing last year due to a single large contract. The risk for investors is that the contract with Magna isn’t expected to generate revenue in future quarters, so the financial strength isn’t going to last. 

The core business is growing and on track to grow by triple digits over the next two years, but it is a small part of the Q2 result and is offset by rising costs. Regarding the robot fleet, the number of bots in service and daily service hours more than doubled, led by daily service hours. 

The margin news is also mixed, with gross profit coming in positive compared to losses last year, but once again, the cause is Magna. Moving down the report, operating expenses more than doubled due to general and administrative, operating, R&D, and marketing increases. The operating losses have more than doubled, and the net losses have about doubled. Much of the cost is related to the production of the new fleet. The company expects to have an additional 250 bots in service in LA by Q1 of F2025 and says it is well-positioned to deliver on Uber’s NYSE: UBER 2,000 bot order. 

Serve Robotics Is Well-Capitalized, For Now

Serve Robotics made significant progress on cleaning up its balance sheet and shareholder structure during the quarter but at the cost of shareholder value. The company logged a cash-flow positive quarter due to note and share sales that left the cash balance near $29 million. The bad news is that the diluted share count is up 45% compared to last year, and $29 million is only enough capital to ensure operations for about 3.25 quarters at the current cash burn rate. Shareholders should expect additional dilutive activities by the end of the calendar year. 

Serve Robotics Up 30% on Q2’s News; Deal with Shake Shack Is a Nothing Burger

A new collaboration with Shake Shack NYSE: SHAK is among the catalysts for Serve Robotic’s share price surge. The news promises to increase the company’s bot usage but is a nothing burger regarding the outlook. The deal is part of Uber's commitment to deploy 2,000 bots and does not increase the number of expected service units. 

Shares of SERV are up about 30% in premarket trading but may already be at their ceiling. The market is trading below a critical resistance target that will likely cap gains. Failing to rise above the $14.50 level will set the stage for a sell-off, which may be sharp and severe given the financial health, outlook for revenue, and short interest. One analyst rates this stock at Strong Buy but gives no price target; only two institutions are tracked by MarketBeat as owning this technology stock.