A tribute to Irving Kahn: a legendary value investor

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The article below, Investment lessons from Irving Kahn was originally published for the UK Motley Fool website back in 2010. The reason I am replicating it here and not amending it is that I’m proud to say that after it was first published I received a very kind email on his behalf from Andrew Kahn, his grandson, who worked with him at Kahn Brothers.

In it he wrote: “Mr Kahn read your article and was very pleased with its accurate assessment of the firm and your attention to the often-overlooked aspects of value investing”.

I’m sad to say that Mr Irving Kahn passed away in 2015 at the age of 109. However, his reputation remains as does the firm he founded and the books he helped write.

Let me quote again from the email I received: “Regarding books to which Mr. Kahn has contributed, he was Ben Graham’s teaching assistant during the period in which Mr. Graham wrote Security Analysis, and, to that extent, he contributed a considerable amount of research to that text. Another book that comes to mind is a small 50-page monograph titled Benjamin Graham: The Father of Financial Analysis that he wrote in the 1970s with Robert Milne for the Financial Analysts Research Foundation. At the time the Research Foundation was the publishing imprint of the CFA Institute, but it is now known as the ‘Research Foundation of the CFA Institute’.

It is therefore my hope that by reading the article you’ll learn from the wisdom of Irving Kahn and therefore avoid catastrophic investment mistakes. Should you wish to delve deeper you can read the books he helped write.

Investment lessons from Irving Kahn

This centenarian has the secret of long profits

At 104 years old Irving Kahn can aptly be described as the grand old man of value investing. While he may not be able to tell us much about the secret of longevity, he has much to teach about profitable investing.

Unbelievably, after 80 years on Wall Street not only is he alive, he is still active. Currently, he’s Chairman of Kahn Brothers Group, a privately-owned investment advisory and broker-dealer firm that he founded in 1978. It has approximately US$550 million funds under management.

Background

He is a value investor right to his marrow. This should be hardly surprising as he learnt from the master, serving as the teaching assistant to Benjamin Graham at the Columbia University Business School.

He was an original founding member of the New York Society of Security Analysts in the 1930s. He was also a co-founder of the Financial Analysts’ Journal and a director of Grand Union Stores, Kings County Lighting, West Chemical, and Wilcox & Gibbs.

Investment philosophy

On the website of the Kahn Brothers it explains that the company employs:

  • As bottom-up stock selection approach
  • Invests in undervalued equity securities that are usually out-of-favour

To determine which security to invests in it uses:

  • Asset valuations
  • Operating performance metrics
  • Long-term fundamental business prospects.

Moreover, “unlike many investment managers, we spend a considerable amount of effort evaluating the downside risk of every investment.”

Interview

In an interview Irving Kahn gave in 2005, he and his son Tom, Kahn Brothers president, outlined in more detail Kahn Brothers’ views on investing.

They regard value investing as an ‘art’ rather than a science, involving qualitative factors as much as quantitative. For that very reason, just as the best artists can occasionally produce poor work, even the best investors will make mistakes.

However, to reduce this risk and ensure a ‘margin of safety’, they follow these rules:

  • Favour those ‘out of favour’. Invest in companies that are either little-known or out of favour. The former tend to be smaller companies.
  • Low or no debt. They like companies with little or no debt and avoid highly leveraged companies.
  • Management stake. They prefer management that owns a lot of stock as they have the same incentive as shareholders to maximise the value.
  • Red flags. Companies that have volatile cash flows, high leverage and poor management should be avoided.
  • Earnings potential. Go beyond the latest set of results to determine the earnings potential of a business.
  • Patience. They are long-term investors with a typical 3-7 year, or longer, time horizon. If there are very few value stocks to be found, they are comfortable holding cash.
  • Identify catalysts. The market’s recognition of value is often dependent on a catalyst —an event that corrects the margin of safety discount. The identification of potential catalysts is therefore an integral part of the research process. Without a catalyst, a prospective investment can remain underpriced indefinitely and thereby result in a mediocre return.
  • Research. Do your own homework and pay no attention to what you see in the papers.
  • Be a contrarian. Maintain a strictly contrarian approach on the basis that half the price of a common stock is usually fashion.

A$23m Stellantis win for Seeing Machines

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It seems likely that the OEM win announced today by Seeing Machines is for Stellantis, using Magna’s driver monitoring system (DMS) in a mirror.

In any case, given the minimum lifetime value is A$23m, it is a pretty safe assumption that it will actually end up being at least three times that figure.

Cenkos close to upgrading

Broker Cenkos has maintained its 20p price target but admits it really could be lowering its discount rate and bumpting up that target price, given Seeing Machines’ accelerating win rate that is leaving competitors far behind.

Here’s the concluding comment from Marc Bunce, the Cenkos analyst covering Seeing Machines: “This new automotive DMS award comes less than two weeks since the last which further supports our view that Seeing Machines win rate and market share in automotive Driver Monitoring Systems are increasing. It is also reassuring to hear that this view is now also publicly supported by Nick DiFiore with his expectation for 40% market share by volume now marginally ahead of our expectations which represent around 38.5% by volume to 2030. We iterate our Buy recommendation and 20p valuation and note there remains significant upside in this from reductions in our discount rate, small increases in our Automotive market share expectations, increases in our cautious aftermarket expectations and the addition of aviation (we will incorporate aviation when we get visibility into meaningful contributions).”

Certainly, when Seeing Machines announces the wins I referred to yesterday I expect Cenkos to upgrade.

The writer holds stock in Seeing Machines.

Takeover thesis maintained as Seeing Machines dominates global driver monitoring market

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Despite the ongoing market falls, my sources (note the plural) indicate that Seeing Machines is winning ‘everything it goes for’. In particular, I’m expecting confirmation of another sizeable contract win in Japan, another huge one in the US and plenty of very positive Fleet news. Thus, my conviction that Seeing Machines will soon attract a bid remains as strong as ever.

Further contract wins

My sources indicate that another Japan win announcement is very, very close. I hesitate to use the word ‘imminent’ but you get the idea. In addition, I’ve heard a whisper that GM has awarded a huge Lidar contract for Ultra Cruise and thus expect that Seeing Machines will soon be getting confirmation of a huge contract. I anticipate this to occur within a couple of months.

I’m also expecting Seeing Machines to win Toyota and announce further expansions with Ford and Stellantis in due course. Lastly, the significance of the recent win of Renault via Qualcomm’s 3rd Generation Snapdragon cockpit platform shouldn’t be ignored. What it indicates is that Seeing Machines will be in every car that has Qualcomm’s system.

In addition, I hear Fleet is doing very well and there will soon be some significant announcements regarding aftermarket sales and a further partnership that should enable it to scale up the introduction of its driver monitoring technology in Europe to comply with the forthcoming safety legislation. 

Clearly, despite the gyrations in its share price, the business is clearly going from strength to strength. That is certainly a claim made by company executives themselves in recent interviews, such as this one with Nick Di Fiore who heads up automotive but also this video with CEO Paul McGlone. It is backed up by leading independent industry analyst Colin Barnden of Semicast Research, as well as financial analysts from a growing number of brokers; Cenkos, Panmure Gordon, Berenberg, Stifel and Peel Hunt.

In short, my thesis that Seeing Machines takes 75% by value of the global DMS/OMS  auto market remains fully intact, a market that could be worth A$1bn in 2025. That figure ignores the market represented by trucks, trams, trains and aviation – global markets in which Seeing Machines is set to dominate.

I, therefore, maintain that a near-term bid for Seeing Machines is very likely – regardless of the state of the overall stock market. (Regarding macro projections, I’ve been a long-term fan of Albert Edwards insightful analysis and would urge every investor to follow him. He has long been castigated as a ‘bear’ but in my opinion he is a realist, and investors are now coming to realise that.)

Seeing Machines is the global leader in one of the hottest areas in a very hot tech sector. It’s partnering with tech behemoths who are led by very smart people. They won’t pass up the opportunity to acquire Seeing Machines. Though they could well face competition from private equity players with a trillion dollars of dry powder.

Peel Hunt note on M&A activity

This very week Peel Hunt issued a note entitled, ‘Accelerating UK bid activity’, written by Charles Hall, Head of Research and Clyde Lewis, Deputy Head of Research. Although it focuses on companies in the FTSE 250, I think there is a read-across for quality companies on AIM. 

Here’s an extract from the note:

“A classic indicator of a disconnect between short-term concerns and longer-term opportunity is when non-equity investors start to buy the assets. This is clearly happening, with 10 bids for FTSE 250 companies progressing currently. This is unsurprising given the de-rating of the FTSE 250, with the overall index-18% YTD and 80% of the members down on the year. This has driven heightened interest from overseas and private buyers. There have been 14 proposed and announced bids in the past six weeks, adding up to ÂŁ21bn of equity value.”

Discussing the themes for investors to consider, the note goes on to state: 

“The pace has clearly accelerated after a slow start. There is a clear focus on hard assets, with most of the businesses being acquired having strong market positions with clear and lasting cash flow credentials. The mix of financial and corporate buyers reflects the strength of balance sheets, access to funding, and the ability to look through a tough economic environment. Weaker sterling should also increase the appetite from overseas.” 

I’d urge investors to do their own research as I’m not Nostradamus, just a journalist. That said, it’s undeniable that investors are still ignoring the oh-so-clear value to be had in Seeing Machines.

Cheer up

With all the terrible things going on in the world I’ve found that watching interviews with the legendary journalist and political analyst Anthony Howard has greatly cheered me up this week.

If that doesn’t float your boat, why not watch Queen performing We are the Champions at Live Aid in 1985. It’s a song that will make a fitting anthem for investors in this company when it is bought for billions. I dedicate it to all investors in Seeing Machines and its hardworking and talented staff.

The writer holds stock in Seeing Machines.

Churchill’s crimes revealed by Tariq Ali

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Tariq Ali’s new biography ‘Churchill: His Times, His Crimes’ is a must-read.

In this 400-page biography of Winston Churchill, Tariq Ali masterfully unmasks the man behind the myth. Using a wide-ranging history of his times to provide context Ali analyses Churchill’s pivotal role in many crimes against both working class people at home and those overseas who he viewed as a potential threat to the British Empire.

It’s a timely book, given the willingness of both the Tories and Labour to embark on post-imperial adventures while invoking the myth of Churchill as ideological cover for such moves. 

In this iconoclastic work the renowned political activist and writer makes a significant challenge to the Churchill Cult, an ideology that has led England further down a political and cultural cul-de-sac since his death.

In doing so, Tariq Ali displays his well-deserved reputation for sharp analysis and courage, uttering truths that few others dare to. Let’s not forget he was one of the few to explain the political origins of the anti-semitism smear campaign against Jeremy Corbyn and to loudly criticise the willingness of most Labour leaders to collaborate in US/NATO inspired wars, in Iraq, Afghanistan and most recently Ukraine. 

Many will now fume at the exposure of Churchill as an inveterate bungler, racist and war criminal, who advocated the use of chemical weapons against the Kurds in the 1920s, allowed 5 million Indians to die of starvation during WW2, and approved the use of nuclear weapons against Japan.

Establishment historians will doubtless queue up to criticise Tariq Ali and the mainstream media will vilify him but Ali clearly realises that Britain needs to confront its past and understand the ugly legacy of imperialism. An appreciation of Churchill’s mistakes and motivation is obviously key to that. Thus, Ali carefully explains the crimes he committed in Ireland, the Middle East, Russia, Greece and India, his actions invariably motivated by a desire to maintain the British Empire.

Ali also convincingly debunks the myth of Churchill as a dedicated anti-Nazi since, until the moment when he realised the British Empire was threatened, he was an admirer of Mussolini and Hitler. Indeed, in unleashing a civil war in Greece (December 1944) Churchill and the British army destroyed the most successful ant-Nazi resistance in Europe. As Ali convincingly argues: “the British Army and its Greek auxiliaries were guilty of serious war crimes, some bordering on genocide.”

As a source from which to establish a more objective view of world history from Churchill’s time to our own Tariq Ali’s book deserves to be compulsory reading in every school across the country. Yet, it is much more than a dry, historical tome as Ali’s practical, ceaseless political energy enthuses the reader. The result is a guide to better understand modern history and Churchill’s role in it and to challenge the dominant ideology that has made a racist imperialist a cult figure.

Surprisingly, despite the terrible crimes it catalogues this book isn’t a depressing read. For that we must thank Ali’s writing, which is infused with his characteristically dry wit and sense of historical irony. His deep cultural knowledge also enhances the overall flavour of the book. For instance, how many biographies of Churchill would footnote novels by Naguib Mahfouz and AndrĂ© Malraux? Clearly, with Tariq Ali the book is the man.

Ali has performed a valuable service in attacking the myth of Churchill, far more effectively even than those who daubed paint on his statue. The hope is that it will reignite an informed debate as to Britain’s present role as a key participant in the United States’ imperial project.

He certainly succeeds in tossing the Churchill Cult into the dustbin of history and, with characteristic disdain, firmly places the lid on the racist, Empire-lover. Nevertheless, it still remains our duty to ensure that the wretched dustbin, full of racism and bloody repression, is finally taken away and emptied.

This article was sent to The Morningstar newspaper. Read the published review of Tariq Ali’s book on Churchill:

Seeing Machines wins A$21m Japanese auto contract

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Seeing Machines has won its first Japanese car manufacturer, rumoured to be Honda, in a deal initially worth A$21m (US$14.6m). The cars will go into production in 2025.

The actual headline figure for the win is highly conservative and is likely to end up many times bigger as the car manufacturer rolls out the technology across an ever-increasing number of models. This is what happened with BMW, Ford and Mercedes and I’m confident it will repeat here. 

Japan turns to Seeing Machines

The really important learning from this win is that SEE has finally cracked Japan, after years of hard work. Marc Bunce, an analyst at broker Cenkos, says: “We believe today’s win is a first step into the Japanese market and that the cost and performance advantages of Seeing Machines software and embedded systems approach, will enable it to win further business with Japanese OEMs.”

Hence, this will prove to be the first of many contracts with Japanese car companies that will confirm Seeing Machines position as the global leader in driver/occupant monitoring (DMS/OMS).

SEE already has a confirmed (conservative) auto pipeline of US$240m, although in all likelihood it is likely to be double that. As Bunce explains: “The ‘cumulative initial lifetime value’ of these award wins now up to A$345m/US$240m which we believe is predominantly based on conservative minimum production commitments for initial vehicle models. However, with actual production volumes usually much greater than minimum commitments, and the technology already being seen on models beyond the initial award win, we believe the likely lifetime value of these awards is already considerably larger.”

Global leadership

It’s now clear, as predicted here 4 years ago, that Seeing Machines is set to take over 75% of the global DMS market. Ironically, it seems that the market has de-rated its main rival Smart Eye based on this assumption without re-rating Seeing Machines. It is a position that, while frustrating to those holding the share, can’t last much longer.

Seeing Machines very dominance is the reason I don’t believe it will be allowed to remain independent much longer. With every auto contract won the importance of Seeing Machines to Qualcomm’s ambitions in the auto market become more obvious. Given that Qualcomm was keen to swoop on Arriver I expect the time is approaching when Christiano Amon will again reach for his wallet to try and secure the global leader in DMS/OMS.

Qualcomm CEO Cristiano Amon let the cat out of the bag in a recent interview, in which he discussed Qualcomm’s diversification strategy. He confirmed, after boasting of its US$16bn auto revenue pipeline and talking about the Arriver purchase: “Clearly M&A is going to be part of Qualcomm as we accelerate those non-handset businesses.”

With SEE’s auto-win rate increasing the prospect of an actual A$1bn pipeline isn’t very far away. If you also include revenues from its fast-expanding Fleet and Aviation divisions, Seeing Machines is a must-have for a chip company that wants to diversify its revenue stream.

SEE is almost totally de-risked, with earning visibility becoming clearer every month. The future cashflows from auto, fleet and aviation are going to be huge. Moreover, with the continuing investment in its intellectual property to ensure its systems remain far ahead of any rival, it has created a strong moat to fight off any would-be competitors for the foreseeable future.

Takeover target

By the end of its current financial year, all this should be clear to even the most sceptical investor but to savvy industry players, such as Cristiano Amon, it must be obvious now. Amon doesn’t strike me as the kind of man who would ever allow a competitor to eat his lunch – as Magna can bear witness.

Only Alphabet, Apple or Amazon would have the financial muscle to separate Qualcomm from its intended target. I’d add in Tesla as a wild card. Elon Musk loves pulling surprises and Tesla needs a decent DMS. Instead of blowing tens of billions creating an in-house solution he might just wake up one morning and decide to buy SEE.

Blue sky valuation?

As to valuation? Well, I’d value Seeing Machines’ Auto division at US$5bn minimum, Fleet about the same. Aviation isn’t as advanced but it’s a huge market that it is developing, so say US$2bn. In total, its intrinsic value is approximately US$10-12bn today.

Alternatively, If someone has the nous to offer 50p a share and SEE accept, well done. In 2 years they could probably float the company for 5x to 10x that. 

Some will doubtless say I’m talking nonsense. But the same naysayers said that 4 years ago when I predicted Seeing Machines would grab a 75% share of the global DMS market.

The writer holds stock in Seeing Machines

Growing broker coverage for Seeing Machines

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Seeing Machines is picking up more broker coverage from quality analysts as it nears an inflection point from growing license fee income from autos and trucks. Berenberg today issued an initiation note with a ‘Buy’ recommendation and a price target of 12p, while Peel Hunt has also tipped SEE. 

Berenberg 12p target

While Berenberg’s price target is quite conservative, the arguments and conclusions contained within the note were reassuring as they confirmed that:

  • Seeing Machines has the “best-in-class DMS technology among peers”.
  • Aftermarket (Fleet) product is a hidden gem. “Guardian
is considered a top product by customers such as Shell, Caterpillar and National Express, who say it has significantly reduced their traffic accidents and cut their transport insurance premiums.”
  • Stellar growth from auto license fees is a near certainty. “As we expect royalty revenues to more than double yoy from 2022E up until 2025E (c113% CAGR), we see an inflection point for the OEM business and for SEE. To top it off, all the revenue projected up until 2024 has already been awarded (ie as long as the cars are manufactured, SEE will hit these revenue forecasts).” 

This extract from the Berenberg note is worth quoting at length:

“OEM business (c60% of 2025E sales) at an inflection point: SEE receives royalty revenue each time a car using its DMS technology is produced. We expect this revenue to more than double every year from 2022E to 2025E (c113% CAGR) based mostly on contracts already awarded. This is, however, assuming just a 33% win rate for SEE and a c25% drop in per-car royalty revenue over 2022-25E. Our channel checks provide a high level of confidence that the group has unparalleled DMS technology, with capabilities to power other smart car features as well (eg occupant monitoring), which along with the regulatory tailwinds mandating DMS should bring about an inflection point for the group’s OEM business. In a blue-sky scenario where SEE has a higher win rate (60% by 2025E) and maintains pricing power (by releasing more features), we see c65%/95% upside to our 2025E group base-case top-line/gross profit estimates. With SEE winning 46% of recent bids, the blue-sky scenario is within reach.”

Note that in its base case for 2025, Berenberg has sales at A$137m and gross profit at A$84m.

In the blue-sky case, Berenberg has sales at A$225m and gross profit at A$163m.

Personally, I expect upward revisions to this very soon as my base case is 70%.

Peel Hunt tips Seeing Machines

Separately, Peel Hunt analysts in their regular ‘Tech: Bits & Bytes’ note recommended Seeing Machines as “a pick-and-shovel play for the smartification of transport”.  

They added: “Seeing Machines is finally starting to see non-NRE OEM revenue’s come through. As the OEM engagements evolve, ARM-like high margin royalty revenue streams should unlock for Seeing Machines.”

Seeing Machines now has broker coverage from Stifel (house), Cenkos, Panmure Gordon and Berenberg, while it is clear that Peel Hunt is clearly following the story closely. As Seeing Machines picks up more auto contracts and grows fleet, not to mention Aviation (and possibly starts to move into other markets, such as marine), I believe this will re-rate. 

Yes, SEE is well down with market jitters. Yet, I’m more convinced than ever that Seeing Machines is likely to be the subject of a bid within the next few months. There is no need for it to show a profit as the coming revenues and profits are clearly coming as license fees ramp up.

Ukraine

As to Ukraine, I think there is scope for negotiation that will reduce tension provided the US and NATO stop trying to bully Russia in its own backyard, using Ukraine as a stick (though that stick got a bit smaller yesterday). Tariq Ali has written great analysis in the New Left Review that puts the recent moves in perspective – though you won’t see him being interviewed on any mainstream media news outlet in the UK.

I’m certainly concerned about a proper stock market crash later this year, as inflation concerns give way to deflation and the growing realisation that only debt is holding the wider stock market up. So Seeing Machines, my advice is to get the deal done by June.

The writer holds stock in Seeing Machines.

Seeing Machines wins Volvo

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As predicted here a couple of years ago, the likelihood that Seeing Machines’ driver monitoring system will be a core safety feature in Volvo’s electric SUV successor to the XC90 now appears overwhelming. Rumour has it that it will be called the Volvo Embla but that hasn’t been officially confirmed, as yet.

The news from Volvo itself that Qualcomm’s Snapdragon Cockpit Platform will be used in Volvo’s “upcoming fully electric SUV” is the clearest indication yet that Seeing Machines has effectively won the brand in the home country of its closest competitor to date. 

I’m sure that, eventually, the Volvo win will be confirmed by all the interested parties but there is clearly some reluctance on the part of Volvo to discuss these matters in detail currently.

Coming on the back of the huge VW win only a month ago, some might expect Seeing Machines to rest on its laurels. However, I’m expecting very positive news in Fleet to accompany, possibly even precede, a series of spectacular auto wins over the next few months.

Of course, I could be wrong so it is important to do your own research.

Roy Holehouse

If I am right, and you make some money out of it, please consider giving a donation to the Roy Holehouse fund. He sadly passed away this week but I’m sure his family would appreciate any help during a terrible time.

Here’s the link to the page: https://www.gofundme.com/f/f3u5cw-a-helping-hand?utm_source=customer&utm_medium=copy_link_all&utm_campaign=m_pd+share-sheet Thanks.

The writer holds stock in Seeing Machines.

Seeing Machines destroys the myth of agnostic DMS

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In a seminal White Paper published yesterday, Seeing Machines destroyed the myth that agnostic software can compete with its optimised and dedicated offerings. That’s why I am extremely confident it will win take at least 75 per cent of all auto contracts going forward through partnerships with Qualcomm, OmniVision, Ambarella, Xilinx and a host of Tier 1s.

In the White Paper, entitled: ‘The DMS Embedding Challenge’ its 3 authors; Timothy Edwards – Co-Founder of Seeing Machines, Rodney Stewart, Strategic Advisor and former Chief Engineer, and Alif Wahid, Senior Staff Core Technology Architect, explained at length how and why its technology is better than any of its competitors for Driver Monitoring.

In so doing it sets out the value of SEE’s IP and its approach in a way that those who truly understand the technicalities will certainly appreciate. I only wish I had the brains to totally understand it all — still, it is pretty accessible.

We can now be sure that all the talk of ‘software agnostic solutions’ from its competitors is nonsense. As it states: “The prevailing idea that any DMS supplier is able to offer highly compute-intensive product solutions in a software-only form, and be agnostic to the architectural differences in industry-leading System-on-Chips (SoCs), whilst also being commercially competitive, is a fallacy”.

I, therefore, don’t expect these competitors to win important contracts going forwards. That certainly isn’t priced into Seeing Machines share price, nor that of those competitors.

Another extract, detailing the possibilities of this technology for assessing human intention and state blew my mind — but then I do have a very vivid imagination!

“Despite being designed and built from the ground up for DMS solutions, the Occula NPU design when married with Seeing Machines DMS algorithm stack, may offer performance advantages to a far wider range of products – any product that is (i) price or power sensitive, and (ii) can yield an advantage from understanding contextual information about humans. We leave it to the reader to imagine the possibilities.”

As the industry and market analysts digest this White Paper I can certainly picture Qualcomm CEO Christiano Amon telling someone to run and get his chequebook, although he will have to be quick: “Looking ahead to the future possibilities in this segment of the automotive market, and also fanning out to other industries that adopt DMS technology as a matter of necessity – we see opportunities emerging for pushing the cutting edge of this technology much further. We have a world class team to exploit those opportunities, thanks to our deep knowledge and skills (spanning the full stack from top to bottom) when it comes to designing DMS products.”

It’s those possibilities that will ensure that Seeing Machines list of admirers must by now include the likes of Alphabet, Amazon and Apple.

Well done Seeing Machines!

The writer holds stock in Seeing Machines.

Desperate stuff from Redeye

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This week’s note on Smart Eye (SEYE) from a Redeye analyst was disappointing and, quite frankly, unfair to investors who mistakenly believe it’s the leader in driver monitoring (or, as it might now term it, ‘interior sensing’). It isn’t. 

Perhaps desperation at the fall in Smart Eye’s share price following the Volkswagen (VW) win by Seeing Machines has prompted this latest attempt to maintain the myth that Smart Eye is the market leader. However, any sober analysis leads one to question this.

Smart Eye’s recent moves on the acquisition front are evidence for me of its late realisation that it can’t compete on the DMS/OMS front with Seeing Machines, proven by its recent failure to win VW.

Furthermore, I think SEYE has overstated the value of its wins to date, while Seeing Machines has understated its own 8 OEM wins. For example, One of Smart Eye’s early wins was with BMW, but it has since been supplanted by Seeing Machines. VW and Mercedes have also gone with Seeing Machines. Do you see a pattern?

In the US, General Motors, Ford and FCA (now part of Stellantis) chose Seeing Machines. Similarly, Fisker and Byton chose Seeing Machines. 

The much-vaunted early Audi design wins back in 2017 by SmartEye have also failed to go fully into production, as has the Jaguar Land Rover win a few years back. Redeye naively assumes that they have been temporarily postponed. As the analyst states on page 5 of this note published on 9th May, 2021: “Smart Eye says it has still not lost any design wins, but some are postponed for external reasons.” Let me suggest that those wins have been lost, as the auto companies concerned realise Seeing Machines’ technology is more advanced.

Importantly, the VW and Fisker wins indicate that Seeing Machines is not only the leader in DMS but is also winning as car manufacturers seek to build in occupant monitoring systems and move to interior sensing. Yes, Smart Eye can talk the talk re. Occupant Monitoring but the only cars currently going into production with OMS have a Seeing Machines system.

A further indication of SEE’s leadership position is evident from the fact that Qualcomm chose to partner only with Seeing Machines. Similarly, Magna has chosen to use Seeing Machines technology. 

My research indicates that Smart Eye’s “pure software” model effectively means that it is treated like a commodity and doesn’t really gain the respect of the Tier 1s whereas, in sharp contrast, Seeing Machines is acknowledged as the expert in DMS/OMS. After all, OMS is effectively only DMS with more occupants. And Seeing Machines leads the way in DMS.

What that means is that OEMs are far less likely to take a chance on Smart Eye for big programmes delivered to short timescales, especially when high-level DMS will be make or break in achieving 5 star NCAP ratings from 2024. It is simply too important for them in a fiercely competitive market to take a chance. For example, imagine the pain that Renault recently experienced at the hands of Euro NCAP, receiving 0 stars for shoddy safety in its Zoe. Such an event must be concentrating minds at car manufacturers around the world. 

That’s why I think Seeing Machines is going to clean up in the DMS/OMS market. Okay, Smart Eye will win a few Chinese models and low volume models elsewhere but for premium and large volume RFQs I don’t expect it to win any of note. 

A further problem for Smart Eye may also be that QC is set to take away its Chinese lunch in due course, supplying Seeing Machines technology as part of its system.

Of course, I may be wrong or, perhaps, my investing in Seeing Machines has affected my judgement.

Well, here’s a little test. Back on 22nd October, 2021 the Redeye analyst wrote: “Three of the largest DMS procurements to date will be completed within next few quarters – where ‘Smart Eye is a force to be reckoned with in all three’. Though we don’t know what this means, we believe Smart Eye is confident of getting at least one or two of these”.

Well, one of them has been completed and it wasn’t Smart Eye that won it. I’m confident that Seeing Machines will win those other two in this financial year, as well as a host of others this year and next. 

Fleet

I’m expecting great things from Seeing Machines’ Max Verberne and his team in fleet, similar to what Nick DiFiore and his team have achieved in auto.

I’m therefore confident that 2022 is set to be a transformational year in fleet for Seeing Machines. Despite the fact it already has approximately 32,000 fleet installations, the pipeline is rapidly expanding, 40% annual growth in revenues is expected. The Shell deal is huge and offers the potential for many thousands of installations each year, National Express is also in the process of rolling out Guardian tech to its enlarged fleet following the acquisition of Stagecoach. That target market represents approximately 40,000 badged as National Express, with approximately 10,000 more belonging to  contractors.

Moreover, such is the potential for driver monitoring as part of an overall control system that it is clear this is only the beginning of a global ramp up in sales. Seeing Machines is only scratching the surface of the potential within telematics with its current partnerships. Europe and the US will be screaming out for this technology as regulations tighten and companies seek to improve both safety and reduce emissions. This will all become apparent as we hear more about the introduction of its 3rd Generation fleet product.

In contrast, SmartEye is ‘pre-revenue’ with a fleet operation that only launched in March 2021, with 20 staff. It had a ‘pilot projects’ operational in July and I look forward to hearing about some meaningful revenues one day soon.

Aviation

Smart Eye is even further behind in aviation. To the extent that even Redeye doesn’t want to talk about it. Suffice to say that it has yet to fly in Aviation.

By comparison, Seeing Machines’ Pat Nolan is airborne, and charting a course for a smooth landing on profit central. Take, for example, the recent agreement with Collins Aerospace, which is the world’s largest Tier 1 avionics company.

In addition, via CAE and L3 Harris, Seeing tech is already in simulators used by Quantas and the Royal Australian Air Force. It is also working with Airservices Australia to use its technology within Air Traffic Control (ATC).

Summary

In summary, not only does Seeing Machines lead in auto, it is far ahead of any competitor in fleet and the only player in aviation. Too little, too late, sums up Smart Eye’s offering in both fleet and aviation. 

I expect the next second half of this financial year to confirm the pre-eminence of Seeing Machines in all three transport sectors. Seeing Machines’ ever-growing pipeline will make this very clear, very soon.

Yes, Smart Eye does have significant value and potential. However, in my humble opinion, it could be an expensive mistake for an investor to presume it is in the same league as Seeing Machines. Of course, any investor should do their own research.

Full-year results for both companies should bear out what I have stated here. In the end, the acid test for both is the visibility of increasing revenues and profitability. If I am correct, Seeing Machines should impress on the upside and Smart Eye will fail to match that.

The writer holds stock in Seeing Machines.

Seeing Machines wins A$125m Volkswagen contract

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Seeing Machines (AIM: SEE) has announced that it has won an initial A$125m contract with a ‘leading German automaker’, confirmed by broker Cenkos and rival Smarteye’s own analyst, as the Volkswagen Group. 

This VW Group includes many well-known car marques: Audi, Porsche, Skoda, SEAT, Lamborghini, as well as Volkswagen.

It’s a win that has was first predicted here and confirms the view expressed back then that Seeing Machines is the ‘King of DMS’ (or should that be interior sensing?) with SmartEye a long way behind. The reason I say interior sensing is that SEE will deliver its FOVIO Driver and Occupant Monitoring System (OMS) for cars hitting the road in 2024.

Given that A$125m is only the initial lifetime value, and historically the initial amount is eventually revised upwards, I expect the actual lifetime amount will be multiples of this. However, that will depend on successful deployment over a number of years. 

Apparently, Seeing Machines now has an auto-order pipeline of roughly A$325m with 8 OEMs. Yet, with another A$1bn of RFQs still being finalised, I consider it very likely that Seeing Machines’ order pipeline will reach A$1bn in 2022.

It’s news that will dismay all its competitors, particularly Smarteye. Indeed, some investors in Smarteye appear to be abandoning ship as the share price is down 12% as I write. However, the smarter ones may be swimming towards Seeing Machines on today’s news.

I’m expecting a lot more positive news announcements from Seeing Machines over the next 2-3 weeks that should produce broker upgrades, so bookmark this website.

The writer holds stock in Seeing Machines