Massive MVIS DD: Finding a proper valuation.
Hello everyone! In this post we are going to explore a way to properly valuate MVIS for the looming buyout or strategic alternative(s) that might jump out and surprise shareholders any day.
As we know, MVIS has had a FOR SALE sign hanging on the front door of the company for approximately a year. Shareholders have battled for this stock and its share price which was as low as $0.15 one year ago.
Every long shareholder has had multiple conversations about what that buyout valuation might be. J.D., aka -(name omitted to comply with site rules)-from StockTwits has taken it upon himself to seek out that valuation and share it with us all.
Without further delay, let’s get to the meat and taters. If you’re not from the south that simply means we should move onto the important stuff.
The Mission Begins . . .
As of recent I have noticed a variance and extreme dichotomy in Microvision shareholders expected MA price / valuation. Being more of a technical trader myself, I haven’t delved into the micro level fundamentals regarding MVIS future share price, especially because there are many unknowns.
In order to exercise that muscle a little further, I took it upon myself to break down some of these fundamentals to see where it brought me. Though there are plenty of unknowns from a fundamental standpoint, there are however many “knowns” about potential suitors and valuations of other companies and technology that I feel could give us a good “ballpark” estimate.
There are currently 5 verticals that belong to the company but the 2 I would like to focus on are the Augmented Reality vertical and Automotive Lidar vertical, as I feel those are the two main driving forces for a higher valuation.
Augmented Reality . . .
Let’s begin with the AR vertical and April 2017 customer (Microsoft). I’m not going to get into the DD or details of why it is suggested that Microsoft is a potential candidate in the MA pool. I feel that most of the investors that have been invested long enough and have done any sort of digging would easily agree that they are possibly in the running. Let’s zoom way out and take this from an overall market approach in regards to the tech sectors value as a whole in the U.S. and move from there.
As it stands in 2020, the overall tech sector was worth 1.6 trillion (varies slightly per source ) with Microsoft coming in at roughly $143 billion for 2020 or almost 9 percent of the overall market. Keep this in mind because this percentage will be used in the future for reference.
It is estimated that the annual AR market will reach 26.75 billion dollars in 2021 and grow annually by 43.8% bringing it to $340.16 billion dollars in revenue by 2028 or roughly $1.03 trillion dollars combined over the next 8 years (SOURCE – https://www.prnewswire.com/news-releases/augmented-reality-market-size-worth-340-16-billion-by-2028–cagr-43-8-grand-view-research-inc-301228121.html).
If we extend that growth to 10 years it would see $1.27 trillion dollars in revenue globally. If we split this similar to the overall U.S. tech market revenue in regards to the global revenue (approximately 33 percent of the overall global market belongs to the U.S.), we are left with $419 billion dollars as a rough and albeit under estimated U.S. AR market. This gives us a basis to start from when considering the possible AR market in the U.S. and Microsoft’s potential piece of said market.
Another source of revenue to consider with the AR vertical is the recent government contract with the IVAS program that has awarded Microsoft $22 billion over the next ten years. According to a recent Forbes article on the contract (SOURCE – https://www.google.com/amp/s/www.forbes.com/sites/moorinsights/2021/04/06/why-microsoft-won-the-22-billion-army-hololens-2-ar-deal/amp/), it is estimated that $4.2 billion of that deal is for the headset itself with the rest coming from “services” and azure computing.
This is an interesting estimate and shows just how important the azure “cloud computing” is in regards to the Hololens and AR market. I believe this can also lead to clues in AR market growth by following cloud growth over the years but we will touch on that later. Let’s start to break these numbers down.
AR Sector Valuation . . .
In valuing a company, two methods often used are the DCF method (Discounted cash flow) and Net Present Value method. Considering there are variables that are currently unknown for Microvision in order to complete these methods, the “usual” methods simply won’t work. However, there is a typical timeline associated with these methods which is usually 5-10 years that we will pull from.
Considering this is an emerging technology that will most likely experience its fastest and most substantial growth within the first 8-10 years, I thought it only fair to look this far out.
Let’s just assume that Microsoft will make up 9 percent of that overall market over the next 8-10 years just as they do the overlying tech sector for the US as a whole. Obviously, with the minimal amount of players in the emerging technology and Microsoft regularly being referred to as the ”leader in AR technology”, that percentage will be much higher.
Let’s look at things from the very low end first. If we take 9 percent of the $419 billion dollar market we come up with $37.7 billion dollars. Again, this is an incredibly underestimated amount seeing as Microsoft has already been awarded $22 billion in a contract this year. When digging for any other information on sales estimates besides the army contracts a video from 2018 was found stating that 50k units had been sold since the release of the Hololens (roughly 2 years). Though this was a rough estimation it will be part of the puzzle in tying in revenue from MVIS “2017 customer”.
If we take a look at the cloud computing growth (Azure) of Microsoft it grew 50 percent year over year. This is very substantial growth and if it continues to grow at this pace it is indicative that AR will follow. This is yet another key for determining possible growth for Microsoft. If Microsoft’s AR revenue can grow by at least the rate stated previously by the “estimated global AR market growth” and indicated by the current azure growth, we can get a rough figure by applying it (43.8%) to the 50k units stated back in 2018. When doing so we end up with 3.9 million units by 2030 or 12.6million units globally over the next ten years.
I think this is a very reasonable estimate when factoring in all of the sales going to not only individual users but businesses, manufacturers, medical and military… but still on the conservative side. This figure would amount to roughly $44.22 billion dollars (pretty close to the initial estimated value of 37.7 billion) if using the $3,500 Hololens unit as a cost basis. I believe that this is a happy medium when accounting for product life cycle and inevitably cheaper headsets down the road while still giving light to the IVAS headset.
This amount would obviously come out to a great deal more if factoring in the aforementioned and more expensive IVAS unit rumored to be about 10x the price tag.
Next we should begin to factor in Microsoft’s net profit margin over the last year of 33.36 percent (this is based off of total net profit margin including software which has a much higher profit margin in general but is used as an average).
If we take the $22 billion dollar contract and add it to the estimated $44.22 billion dollars in AR market revenue, we are left with $66.22 billion dollars and an adjusted increase of 4.5 percent of the overall market to 13.5 percent, which I believe is still a relatively low “piece” of the overall AR market as a whole.
We can then adjust that revenue based on the overall profit margin to get a figure of $22 billion profit with $44.22 billion going to expenses. This gives us a rough expenses breakdown of the units in regards to materials.
When compared to the oculus rift VRheadset (35%) or IPhone (35-45%) material costs, it would infer an estimated $23-29.7 billion dollars going towards expenses upon comparison. Now we have a rough idea ($23-44.22 billion) of the overall costs associated with the estimated growth of AR. Again, these are not known factors only estimations. I think you will find costs on average will start much higher in the developmental stages.
I think this is worth mentioning because the other technology referenced has had a much longer product life cycle which has led to cheaper costs throughout their timeline. In addition (and as stated previously), I also believe it is an underestimation of Microsoft’s total percentage of the AR market as a whole but we are going to build towards a closer “proper” value. These initial estimates are formed as a base to start from when trying to find said value (a minimum if you will).
Now let’s look into Microvision’s revenue regarding the “2017 customer” and move closer towards the AR verticals value in relation.
Putting a Value on the AR Vertical . . .
In a video released in April 2018 by European Patent office (SOURCE- removed to meet site rules), it states that approximately 50,000 units have been sold thus far.
(Another side note of the video is the reference to the lenses – LBS display – as “the most important feature”)
This 50,000 unit estimate is over a span of roughly 2 years.
If we cross reference this number with the estimated CAGR (81.5%)of AR/VR as provided by IDC (SOURCE- https://www.idc.com/getdoc.jsp?containerId=prUS46143720), we get a sales amount of 17,762 customer units in 2017, 32,338 units in 2018 (meeting the 50k units suggested in the video) and 58,512 units in 2019.
Let’s stop here in 2019 and take a look into the MVIS 2019 Q4 earnings report. In the earnings report the company stated that it had shipped $3.4million dollars to its “2017 customer (SOURCE –https://microvision.gcs-web.com/static-files/02ef53ba-d30c-4ef5-a41e-ef9dbc012602) presumed to be in relation to the LBS display for Microsoft’s Hololens 2. This gives us a basis for revenue from Microsoft for that quarter.
If we then take the estimated 58,512 units and divide it evenly into 4 quarters the result is 14,620 units per quarter.
We can then use the $3.4 million dollar shipment stated in the earnings report and divide it by the estimated units to get $232.55 per LBS display. This makes up an estimated 6.64% cost of the entire Hololens 2 unit as a whole.
This percentage seems to be a fair estimate when looking at raw material costs for technology across other platforms. For instance the oculus rift saw $206 in material costs for its $599 headset (SOURCE – https://www.roadtovr.com/oculus-rift-components-cost-around-200-new-teardown-suggests/)(35%) and the IPhone 11 ($1099) saw roughly $490.50 in material costs (SOURCE – https://www.investopedia.com/financial-edge/0912/the-cost-of-making-an-iphone.aspx)(35-45%).
Now let’s take the CAGR percentage and test it across the next 8 years (2021-2028). When doing so it yields a total of 12,506,413 units in 2028 and a total of 27,721,401 units combined over the next 8 years. This may seem like a big number in comparison to where we had started but according to the IDC, AR shipments will be matching VR shipments by 2024 (source) in which they predict the sector as a whole will reach 76.7 million units. 31.28% of that going to standalone AR headsets (24 million) and 1,152,461 units for Microsoft in 2024 respectively. When looking through this scope you will see that of the estimated growth in AR only 5 percent of it is held by Microsoft (Hololens) using this model.
This perspective is important because it shows that even though the numbers I’m using to provide estimates may have seemed large to begin with, they actually turn out to be very conservative. We can take the total estimated Hololens units over the next 8 years and multiply them by their cost to get a revenue of $97 Billion.
We then take Microvisions LBS cost percentage of 6.64 percent (going to Microvision) we arrive at a total cost of $6.4 Billion. This is where the value really starts to show for Microvision’s AR vertical. That is a substantial amount and doesn’t include any changes to contracts, IP, Patents (that span across many verticals), future improvements on the LBS display, branches to other products including the AR vertical or licensing to other companies.
This cost of doing business is just that and doesn’t include any other potential revenue. Though it may have seemed like a long way to get to this point and that some of this could have been excluded, I feel it is very important to start at a macro level of the overall market and work down to these finer details. It also gives us an idea of the potential figures using various factors associated with the industry. In doing so I feel this establishes a conservative ballpark figure and a base for the AR verticals revenue potential… Now we are on to the Lidar vertical.
Automotive LiDAR . . .
The automotive Lidar vertical is arguably the biggest potential driving force for a higher valuation for Microvision. Not only is it an emerging technology but it is a current need in the automotive world in regards to public safety.
With 38,000 people being killed every year in the U.S. resulting in $55 billion in medical and work loss costs, it is easy to see the need. Additionally, this number only accounts for deaths (who’s number one cause is distracted driving). When we expand the scope to just accidents in general the cost reaches an astounding $230.6 billion (SOURCE – https://www.isaacsandisaacs.com/car-accident-lawyer/auto-crash-statistics).
By looking at these values I think it’s easy to see the absolute need for such a product and the motivation for Microvision CEO Sumit Sharma‘s intense focus on the vertical since his integration into the company. Now let’s take a look at some known valuations of other automotive Lidar companies.
The two companies often seen adjacent to Microvision in regards to automotive Lidar are Velodyne (VLDR) and Luminar (LAZR). At their peak, the company’s market caps were at $6.1B (VLDR) and $11.2B (LAZR) respectively.
Of the two it is clear that the biggest competitor is Luminar. Luminar has two Lidar units, the Hydra and Iris. The Hydra is used for “testing and development programs” and the Iris won’t be available until sometime in 2022.
According to a Feb 10th press release (SOURCE- https://microvision.gcs-web.com/news-releases/news-release-details/microvision-inc-announces-progress-its-automotive-long-range/), Microvision lidar unit is set for demoing in the April timeframe and is capable of achieving scale at costs below $1,000 ASP, “a key price point expected for commercial success”.
Comparing the Specs added from the press release for Microvision to Luminar’s Hydra you will find the following differences.
First off Luminar’s horizontal FOV can’t be reconfigured. Microvision’s, on the other hand (according to this patent (SOURCE – https://patents.google.com/patent/US20200379092A1/en), can dynamically reconfigure both vertical and horizontal FOVs. This provides much greater versatility and allows for scanning in near, mid and far fields at different frame rates, FOVs, and resolutions per field.
In addition, the Luminar Hydra’s maximum frame rate of 30 Hz does not stack up against Microvision’s 240 Hz or its range of adjustable frame rates making for greater resolution and adjustability overall.
Then there is the form factor. In a visual comparison Microvision’s LRL sensor is a fraction of the size and able to be utilized in vehicle design where the Hydra is only applicable to testing situations.
(If you are looking to take a deeper dive into these specs and comparisons I recommend taking a look here: removed to meet guidlines).
So what is the secret sauce of Luminar’s eclipsing Market cap? Surely it has to be their product and sales right? RIGHT??!! Well, no, not even close. According to Luminar’s financial results mentioned here (SOURCE – https://arstechnica.com/cars/2020/12/lidar-startup-goes-public-makes-founder-a-billionaire/), it disclosed that they expected to sell 0.1 thousand or 100 lidar sensors in the 2020 calendar year.
No, that’s not a typo. 100 units.
Part of me finds this interesting and the other part finds it absolutely ironic. Ironic in the sense that one of the biggest “bearish” arguments against MVIS is that they have no product sales, yet a company with an $11B market cap (albeit less now) sold 100 Lidar units the size of a fishing tackle box in a year. Puzzling, but let’s move on to the autonomous vehicle market overview.
Automotive LiDAR Market . . .
In 2020 the U.S. autonomous vehicle market was estimated at $56.21 billion and with a CAGR of 36.48% is expected to reach $220.44 billion by 2025 and over $600 billion total over the next 5 years (SOURCE – https://www.marketdataforecast.com/market-reports/self-driving-cars-market).
If we take a look at the top 5 vehicle manufacturers in the US in 2020: (SOURCE –https://www.statista.com/statistics/343162/market-share-of-major-car-manufacturers-in-the-united-states/)
- General Motors (17%)
- Ford Motor Company (14%)
- Toyota Motor Corp (14%)
- FCA (12%)
- Honda Motor Company (9%)
You will notice they make up 66% of the overall market. Their average being roughly 13% which would equate to roughly $78 billion dollars of the 5 year estimate listed previously. In 2020 there were approximately 8.8 million vehicles produced and over 53.8 million total over the last 5 years. This takes into account the severe decline in 2020 due to COVID.
With Microvision’s price point of under $1000 per LRL unit and 4 sensors being used per vehicle (could be 5) that puts the cost of equipping a vehicle at under $4000.
If we factor in that amount with just 5 percent of the vehicles produced in the last 5 years in the U.S. (2.69 million) we get an estimated cost of $10.76 billion.
This cost would equate to just 7.25% of the average potential market share ($78B) for just the autonomous vehicle market alone.
That is quite the price tag even when calculated at a very conservative market share. If we then add the two stated “costs of doing business” we come to an estimate of $17.1 Billion…. do what you will with that number.
Final Thoughts . . .
If it hasn’t been clear in my statements, let me be as translucent as I can. These estimates are not a definitive value for Microvision. My only goal here is to shed light on the incredible potential this company has and perhaps create further thought for those who fail to realize this potential.
Upon coming to these numbers and realizing that they only include 2 of the potential Microvision verticals (excluding consumer lidar, interactive projection and display only) it has become quite clear that MVIS is worth well over its current $2B Market Cap.
The golden question is, how much?
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April 21, 2021 at 04:24PM