Sage Investment Club

carloscastilla Arbe Robotics Ltd. (NASDAQ:ARBE) is currently signing agreements with Tier 1 vehicle manufacturers, and may experience sales growth thanks to the automatically driven vehicle revolution. In my view, if management successfully finds more functionalities for its chips, I believe that the company’s fair price could be worth around $18.6 per share. I also see some risks from raw materials inflation and perhaps lack of commercial development. With that, I believe that the company’s stock is currently undervalued. Arbe Robotics One of the main objectives of Arbe Robotics is the creation of software for 100% autonomously driven cars, through the development of highly developed radars and capture technologies, which ensure both efficiency and safety in the implementation of these systems. Arbe Robotics claims to be a leader in the development of ultra-high definition 4D radars, currently mainly offered to companies that manufacture cars and transportation devices. Although none of these 100% automatically driven transports has yet come in the market, Arbe claims to be paving the way for their prompt implementation. This radar technology is also applicable to ships, planes, submarines and helicopters as well as motorcycles and other types of location formats such as GPS. This indicates the great breadth of latent demand that exists in this regard and the breadth of scale that Arbe has in the future in its operations. Along with the transfer of traditional fuel cars to cars with electric operation, which has already set deadlines in some countries, mainly in the United States and Europe, the possibility of manufacturing self-driving cars has gone from being a fantasy in the last two decades to becoming a reality. This, in some way, does not guarantee, but does legitimize and enhance the current developments of Arbe Robotics. Considering the expectations of some of the clients and partners of Arbe Robotics about the future, I believe that Arbe Robotics is worth doing some due diligence. Source: Investor Presentation Solid Balance Sheet With Almost No Debt As of September 30, 2022, Arbe Robotics reported cash worth $63.212 million, with trade receivables worth $2.094 million and a prepaid expense of $1.492 million. Total current assets stand at $67.341 million. Current assets are significantly higher than the total amount of assets, so I would say that the company’s liquidity stands at a good position. On the other hand, non-current assets include operating lease rights of use assets of $0.536 million with property and equipment worth $1.68 million. Total non-current assets are equal to $2.219 million. The total sum gives us a total assets of $69.560 million. Source: 10-Q Arbe Robotics also reported trade payables worth $1.712 million along with employees and payroll accruals of $2.086 million, accrued expenses of $2.609 million, and total current liabilities worth $7.142 million. Warrant liabilities, which I assumed as debt, were equal to $4.992 million with total long term liabilities of $5.065 million. In sum, I believe that the company’s financials and long term obligations are not worrying. Source: 10-Q Market Expectations Include Triple-Digit Sales Growth And 2024 FCF Margin Of 29% I believe that the guidance given by Arbe Robotics is quite beneficial. Management expects annual revenue close to $4-$7 million, which is a larger figure as compared to 2021 net revenue. Source: Investor Presentation Market expectations and guidance from financial analysts seem quite beneficial. 2024 net sales would be $135 million with net sales growth of 230.88%. In addition, 2024 EBITDA would stand at $47 million accompanied by an EBITDA margin of 34.81%. 2024 EBIT would be close to $39.4 million, with 2024 operating margin of 29.20% and EBT of $47.4 million. Besides, net income would be close to $35.7 million, with 2024 free cash flow close to $39.2 million and FCF margin around 29%. Source: Under Normal Conditions, More Agreements With Tier 1 Manufacturers Could Imply A Valuation Of $18.6 Per Share With offices currently in Israel and the United States, Arbe declares to offer and encourage producers of means of transport through the development of its software as well as the delivery of different types of robots that serve to automate the processes of production of various robotics elements. Arbe Robotics’ current objective is to develop sensors that allow the identification of dangerous objects on the road as well as the immediate disqualification of all types of elements captured by its radars in order to avoid misdiagnosis, consequently offering a more effective service as well as greater safety and less chance of accidents. Under this case scenario, I assume that autonomous car manufacturers will find the identification of dangerous objects necessary. Hence, I expect sales growth to be close to the growth of the autonomous car market Along with its radars, Arbe offers chips that are easy to install on various objects, 100% connected through the network with its radars, thus immediately becoming part of its extensive network of information provided in high-resolution images. These chips are divided into three large classes, emission chips, reception chips, and processors. This segment of chips is being developed in parallel to its radar services, which, although they have many similarities, offer different functions and different business possibilities. In my view, if management finds more applications for its technology, revenue growth potential could increase significantly. Finally, under this case scenario, I assumed that more Tier 1 manufacturers will successfully sign agreements with Arbe Robotics. In this regard, let’s note that the company has already signed agreements with Valeo, Weifu, Hirain, and BAIC. I believe that other manufacturers may be interested once they notice the existing agreements reported by Arbe Robotics. Our business development strategy is based primarily on cooperation with Tier 1 automotive manufacturers to integrate our radar chipset into the radar systems manufactured by the Tier 1 manufacturers, which will ultimately be sold by the Tier 1 manufacturers to the OEMs. Source: Prospectus Source: Investor Presentation Considering that the autonomous car market is expected to grow at close to 25.7% CAGR, I assumed that Arbe Robotics’ revenue growth would be close to this rate. The Worldwide Autonomous Car Market’s value in 2021 was worth USD 25.14 billion, and by 2030 will reach USD 196.97 billion at a 25.7% CAGR. Source: Autonomous Car Market Size to Reach $196.97 Billion. My expectations include sales growth close to 25.7% from 2026 to 2029, 2032 net sales of $673 million, 2032 EBITDA of $126 million, and an EBITDA margin close to 18%. Besides, FCF would stand at $93 million, with a FCF margin of 14% and a NPV of FCF of $387 million. Source: Malak’s DCF Model If we assume an EV/EBITDA of 13x to calculate the net present value, the NPV of the terminal value stands at $730 million. Now, with cash of $63 million and debt of $4.9 million, the implied equity would be $1.17 billion, and the price would be $18 per share with an IRR of 8.73%. Supply Chain Issues, Failed Commercialization, And New Data Protection Regulations May Bring The Fair Price To $3.7 Per Share It usually happens in young companies that the foundation and the main ideas are provided by people who do not have a great knowledge of the commercial conditions of the markets. This, in some cases, affects the possibility of commercial development of the companies, preventing the weaving of strategies, as in this case, of diversifying their products. Besides, the growth, development, and success of Arbe Robotics’ commercial model depend on the success of the implementation of the company’s technology on public and private means of transport in the future. If this did not happen, due to the economic crisis, lack of access, or the development of other technologies in parallel, the high degree of development that Arbe has achieved in its products would be obsolete. Under this bearish case scenario, I would expect a decline in sales growth, or lower sales growth than initially expected. Besides, the creation and development of new products depend on components and resources, which are the result of extraction processes that do not always comply with regional government requirements and regulations. In addition, inflation and increase in the price of certain raw materials may generate instability in projections made by Arbe Robotics. We are subject to the requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, that will require us to determine, disclose and report whether our products contain conflict minerals. The implementation of these requirements could adversely affect the sourcing, availability and pricing of the materials used in the manufacture of components used in our products. Source: Prospectus The company’s supply chain may be affected by changes in regulatory conditions regarding the extraction of necessary resources. Under these bearish conditions, I would expect a decline in the company’s FCF growth expectations, which may lead to lower stock valuation. Finally, I believe that new regulations with regard to data protection in the United States or Europe may create a lot of issues to Arbe Robotics’ business model. If management is forced to invest much more in R&D or capex to comply with the regulations, FCF growth would likely decline. Our current and potential future operations and sales subject it to laws and regulations addressing privacy and the collection, use, storage, disclosure, transfer and protection of a variety of types of data. For example, the European Commission has adopted the General Data Protection Regulation and California enacted the California Consumer Privacy Act of 2018, both of which provide for potentially material penalties for non-compliance. These regulations may, among other things, impose data security requirements, disclosure requirements, and restrictions on data collection, uses, and sharing that may impact our operations and the development of our business. Source: Prospectus With net sales growth around 5% from 2026 to 2032, 2032 EBITDA margin of 15%, and 2032 FCF margin of 10%, 2032 FCF would be $30 million. Now, the NPV of the FCF from 2023 to 2032 would stand at $126 million. Source: Malak’s DCF Model My assumptions also include an EV/EBITDA of 5x and a WACC of 16.5%, which resulted in an equity valuation of $234.5 million. Finally, the fair price would be $3.7 per share, and the IRR would be -0.85%. Conclusion Arbe Robotics operates in a market that is expected to grow at close to 25.7% CAGR, and Tier 1 manufacturers are currently signing agreements with the company. In my opinion, if management is correct about its guidance, revenue could experience significant net sales growth in the near future. Besides, if management finds more functionalities for its chips, I believe that the total valuation could be close to $18.6 per share. Even taking into account risks from supply chain, raw materials inflation, or lack of commercial development, I believe that the stock is undervalued.

Source link

Leave a Reply

Your email address will not be published. Required fields are marked *