Rubicon: High Tech Waste Management In Unfavorable Conditions

Rubicon Technologies, Inc. (NYSE:RBT) competes as a cloud-based solution in the waste management and recycling sector, marketing its solutions to businesses, governments, and organizations around the world.

The company went public via a SPAC merger, and contrary to many such deals, it has a track record of growing significant revenue, in what should be over time, a disruptor to the waste management and recycling industries, similar to how cloud-based solutions in the real estate industry are bringing buyers and sellers together on an online platform.

In the case of Rubicon, it provides a platform where those working in waste management and landfills can interact with businesses and government entities for the purpose of streamlining the supply chain within the sector.

In this article, we’ll look at some of the initial numbers after the company went public, and some of the things to consider if thinking of whether or not to take a position in Rubicon, including the implications of being considered a high-tech stock in an unfavorable interest rate environment.

Latest earnings numbers

Revenue in the third quarter of 2022 was $185 million, up 24 percent from the $149.2 million in revenue generated in the third quarter of 2021. Revenue from its Services segment was $162.8 million, and revenue from its Recyclable Commodity segment was $22.1 million.

Revenue for the first nine months of 2022 was $506.4 million, up from the $420 million in revenue from the first nine months of 2021.

Gross profit in the reporting period was $6.6 million, an increase of 16.7 percent from the $5.6 million gross profit generated in the third quarter of 2021.

Adjusted gross profit was $14.1 million, an increase of 18.9 percent from the $11.9 million in adjusted gross profit generated in the third quarter of 2021.

Net loss in the third quarter was $(211.1) million or $(0.37) per share, significantly more than the $(18.1) million in the third quarter of 2021. For the most part, that was from a one-off transaction-related expense.

Adjusted EBITDA in the third quarter of 2022 was negative $(21.1) million, down from the negative $(13.3) million in the third quarter of 2021.

Cash and cash equivalents at the end of the third quarter of 2022 was $4.46 million. Long-term debt at the end of the reporting period was $70 million.

Revenue net retention in the reporting period was 118.3 percent, compared to 109 percent from the third quarter of 2021. Rubicon defines the metric “as a year-over-year comparison that measures the percentage of revenue recognized in the current quarter from customers retained from the corresponding quarter in the prior year.”

I do think that is a helpful metric that provides investors with a look at customer satisfaction within the context of the services offered by Rubicon. It offers a snapshot of revenue contraction or expansion to give a sense of whether or not the company is retaining or losing momentum.

Unfavorable market conditions

While Rubicon is a real company generating what looks to be a sustainable upward growth trajectory with revenue, it has to be taken in consideration that the timing of going public wasn’t optimal under current market conditions, and it’s likely to get punished going forward as the Federal Reserve still has its sights on raising interest rates in the near term.

Why that matters is because the company is considered a high-tech growth stock by the market, and under a high interest rate environment stocks like this get hammered, as evidenced by the big hit high-growth tech stocks took in 2022, and are likely to continue to take in 2023; at least in the first half of the year.

The other unknown in 2023 is whether or not the recession is going to last longer and go deeper, or if it’s going to be a short-term headwind that unwinds in the second half of the year.

The vast majority of top-level managers confirm they simply don’t have the visibility or clarity at this time to know which direction the economy is going in 2023, and so are taking more of a defensive posture while working on increasing revenue. In other words, they’re holding back on spend until there is a better understanding of how the economy is going to unfold over the next year or so.

Considerations in trading the stock

Even though waste management is usually considered recession-resistant, in the case of Rubicon that doesn’t apply because of the high-tech nature of its business within the sector.

And while the company has been around long enough to leave a historical record of growing revenue, it’s doing so while continuing to lose money. For that reason, one of its major near-term goals is to start removing costs out of its operations even as it strives to win more business.

Of course, scaling the business is one way of improving margins, but lowering expenses must be done in conjunction with that in order to move toward sustainable profitability.

So when thinking in terms of trading the stock, it should be first considered a speculative play, as it balances generating revenue growth versus eventually producing a profit. The other consideration is it must prove it is able to retain existing customers while it expands its customer base.

With the current high interest rate environment, which is unfavorable to companies like RBT, it is probably a better day trade or swing trade security than it is a long-term holding.

Even though the stock price has plunged since it went public, it could easily fall much further when each interest rate hike is announced in the next couple of months, and possibly longer.

My thought on interest rates is the Fed will probably continue to raise them to around 5 percent, or possibly a little higher before it starts to level off, primarily because of the impact it has on the ability of the U.S. to pay off its burgeoning debt load that is over $31 trillion at this time.

So, RBT is likely to remain under pressure for at least the first calendar quarter of 2023, and will probably experience a lot of volatility during that time, offering chances to take short-term positions based upon the share price movement of the stock. If the stock were to really correct strongly, it could be a good swing trade if there are no negative catalysts behind the correction outside of increasing interest rates, which are more than likely already priced in.

As for a long-term holding, I think investors would want to receive confirmation the company has secured more funding and unveils its plan to reduce costs going forward. It has said it will do so in the quarters ahead, and it is worth waiting to hear what the company’s strategy is before committing to taking a long-term position.

Conclusion

Since waste management, landfill, and recycling are, overall, highly fragmented markets, the cloud-based solution offered by RBT is a compelling one that has the potential to be a long-term winner.

In the near term, it’s probably going to trade very volatile and must increase the amount of capital at its disposal in order to grow its customer base and have enough cash available to keep operations going as it waits for market conditions to improve.

Taking this time to remove costs out of the business is the right thing to focus on under these market conditions, and if it’s successful in improving its cost structure while expanding its customer base, over time it could be a nice holding that rewards patient shareholders.

But until there’s more visibility on its cost-cutting strategy, the actions of the Federal Reserve, and the health of the economy, RBT is a stock that I wouldn’t take a position in other than for making a day trade or swing trade to take advantage of the volatility of the share price.