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Copying someone’s investment methodology verbatim doesn’t teach you how to become a better investor. Arriving at your own set of investing rules does. Our own tech investing methodology is a living document that evolves slowly over time in response to the rapidly-changing technology domain. In that document, you’ll find numerous “showstoppers,” hard rules which keep us from investing in certain companies. One such rule is heavy customer concentration risk.
Technology stocks are some of the most volatile assets out there, so it makes sense to reduce risk. If you have a company with just one customer, that customer has all the power at the negotiating table. If that sole customer happens to be one of the world’s largest companies, then your position of weakness is even more pronounced. Ditto for the U.S. government. That’s why when we found out Symbotic stock (SYM) had nearly fully committed to Walmart, it was a showstopper we couldn’t look past.
Symbotic Stock and Walmart
There’s another train of thought that says, “having one of the world’s largest companies as your sole customer is a good thing” because it validates your offering. Investors in that camp will be stoked to hear that Walmart, Symbotic’s largest customer, accounted for approximately 88% of their total revenue in fiscal 2023, and for a significant portion of their $23.3 billion backlog. That’s down from 94% in 2022, so the Walmart dependency is on a decline. This begs the question. At what level would the Walmart dependency need to be for us to look past this showstopper?
A small red flag starts when a customer accounts for 10% or more of total revenues. That’s why