Why Seeing Machines is grossly undervalued

Long term holders of Seeing Machines are well aware that it is the global leader in Driver/Occupant Monitoring and seems set to take a 60-75%, chunk of the automotive market driver/occupant monitoring by 2026.

Now estimates of the size of the light vehicle automotive market by this date do differ but not hugely. IHS estimates 110m light vehicles will be sold annually by 2026. Cenkos estimates 112m and a penetration rate for DMS of 67%, with Seeing Machines estimated to win 38% market share in calendar year 2026 producing an annual revenue figure of A$248m from auto alone. (You can see this information on Page 8 of its note issued on 2 February 2021).

Cenkos has a price target of 16p, which certainly appears miserly given the massive revenues that are coming further down the line. The reason for this is two-fold:

  • Firstly, Cenkos has applied a discount rate of 11.5% on its future guaranteed cash flows from vehicles in which Seeing Machines’ DMS and OMS is to appear.
  • Secondly, Cenkios can’t provide figures for RFQs that are expected to be won this year and the cars in which it will appear with Qualcomm. That’s fair enough although Cenkos has admitted that the figures against contracts already signed are minimum amounts and quite likely to increase at least 3 times.

Discount rate to fall

This year, as auto contracts are won – and they will be won – I’d expect a double whammy to significantly increase the Cenkos target price as future guaranteed revenues rise and its discount rate falls.

I’d argue that even now a discount rate of 7% based purely on the conservative (how I dislike that word) figures from Cenkos would be more appropriate given the quantum of risk. Were that to be applied, the price target from Cenkos would be nearer 40p right now.

[For the purposes of simplicity I’ve ignored the accelerating revenues from its driver monitoring as a service Guardian products that feature in trucks. I’ve also ignored its products in aviation — though, they’re expected to be very significant in time.]

Despite the po-faced analytical rigour adopted by many analysts  when discussing equity risk premiums it’s hardly an exact science, more of an art.  The disparate factors you need to take into account are the stuff of which academic careers are made. And anyone who doubts the complexity in modelling them should read this paper by Aswath Damodaran.

Conclusion

What I’m trying to convey is that Seeing Machines is grossly undervalued currently and, though I expect it to hit 40p this year as Cenkos ups its price target due to increased future auto revenues and a reduced risk rate, I don’t expect it to hit fair value even then.

Only when people realise Seeing Machines’ market share is going to be in the 60%-75% region and that it is likely to be bought for many billions as Mobileye was (US$15.3bn), will Seeing Machines price come close to matching its intrinsic value.

My guess is that uninformed observers will wonder in awe as Seeing Machines’ share price accelerates over the coming 12 months. My view is that it’s all very predictable if only you’d conducted sufficient research.

The writer holds stock in Seeing Machines.

3 thoughts on “Why Seeing Machines is grossly undervalued

  1. Seeing Machines definitely has potential to be a leader in DMS.
    How would Smart Eye and its acquisition of Affectiva, impact on Seeing Machines?
    I am curious to know. I do want to invest in Seeing Machines but it will be a long term play.
    What is your forecast Price Target in 2025 or so?

    • Hi Ravi, I think it is clear that Seeing Machines is the leader in DMS and OMS. Just trawl through this site and see the cars it is in, with many more models coming out over the next 2 years. Qualcomm didn’t choose an exclusive relationship with anyone else for DMS/OMS. I think it will take a while for Smart Eye and Affectiva to get their act together – acquisitions take a while to bed in. Great PR though! Behind the facade, it looks like a desperate move by Smart Eye to improve its offering as it is clear that Seeing Machines is eating its breakfast, lunch and dinner. If Seeing Machines hasn’t been acquired by 2025 I’ll be shocked. Still, if it is independent I expect it will be around 15. That is pounds, not pence.

      • Perfect. I agree with you. I have been understanding and reading through each company’s website, Cipia, Smart eye, etc. I think Seeing Machine will come out as winner if not a good runner up with nearly the price target that you indicated. I think Intel missed the boat with Mobil-eye. They only gave industry what they thought industry needed, not what industry cried out for. Seeing machine hit the nail in every corner including Automotive, Rail, Fleet and Aerospace.
        Keep out fingers crossed.
        I am aggressive investor in Seeing Machine.

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