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Smart Eye

* Currently unprofitable and cash flow negative, relying on capital markets for funding, which may pose risks in challenging market conditions.
* Automotive industry's cyclical nature and potential disruption from self-driving technologies could impact long-term competitive advantage.
* Limited ability to increase prices, suggesting potential pricing pressure from OEM customers.
* Uncertainty about the longevity of competitive advantage beyond the next decade, particularly with rapid technological changes in the automotive sector.

* Strong market position with significant growth potential, benefiting from regulatory tailwinds and expanding into new technologies like Interior Sensing.
* Asset-light business model with high scalability, allowing for growth without heavy reinvestment and potential for upselling to existing customers.
* Clear competitive advantages including economies of scale, strong OEM relationships, and first-mover advantage in a complex, high-barrier industry.
* Diversified revenue base across multiple OEMs and business units, reducing dependency on single customers or markets.
* Products contribute to societal good by improving road safety, aligning with sustainable progress through technology.

* Lack of consistent profitability, with operating margins, ROE, and ROA below desired thresholds or industry averages.
* Inconsistent earnings growth and stability over longer periods, potentially indicating vulnerability to market fluctuations.
* High goodwill-to-assets ratio compared to industry average, suggesting reliance on acquisitions and potential risk of future impairments.
* Absence of a consistent dividend history or growth, limiting appeal for income-focused investors.

* Strong gross profit margin and revenue growth, indicating a competitive product mix and potential for increased profitability.
* Solid financial health with current assets 1.5 times greater than current liabilities and manageable debt levels relative to cash flows.
* Efficient inventory and accounts receivable management, suggesting effective operational control and cash collection practices.
* Low occurrence of one-time charges, demonstrating financial transparency and consistent reporting practices.

* Management has struggled to deliver on promises consistently, particularly regarding the adoption rate of cars produced with DMS, leading to delays in expected revenue growth.
* The CEO's tendency to chase new trends before fully capitalizing on previous investments has led to concerns about capital allocation and unnecessary dilution for shareholders.
* The company lacks a clear CEO succession plan, potentially risking future leadership transitions and long-term strategic continuity.
* Smart Eye has faced challenges in managing its cost base, leading to liquidity issues and a necessary rights issue in 2022, negatively impacting shareholders.

* CEO Martin Krantz demonstrates strong industry knowledge, visionary leadership, and commitment to innovation, consistently anticipating market trends and maintaining Smart Eye's competitive edge.
* The company has a lean organization promoting self-direction and accountability, fostering innovation and adaptability within each operating unit.
* Management shows a strong commitment to innovation, with a clear strategic plan focused on scaling up DMS and achieving design wins in interior sensing.
* The company consistently communicates with investors, focusing on long-term business value and tying company success to its mission of saving lives in traffic.
* Significant insider ownership (12%) and founder involvement indicate strong alignment with shareholder interests and confidence in the company's future.

Today’s design win of one car model for a major Chinese OEM has an expected lifetime value of SEK 50m. The press release specifically says the OEM is one of the largest in China. In our view, there are about 4-5 potential, major Chinese OEMs that fit this description, with annual volumes of minimum well over 1 million cars, up to possibly several millions for the largest ones. However, the entire platform is only valued to SEK 350m, equal to 500 000 – 1 000 000 cars per year, by Redeye&#8217;s calculations. In our opinion, this is another (of many) conservative estimate from the company. We do not see any signs of lowered prices. We want to once again highlight that we think the consensus view is the opposite (i.e. projections are generally seen as inflated), which could allow for rather pleasant upside surprises. We welcome this cautious approach from Smart Eye.
The early expected start of production in Q1’22 positively surprised us. We believe there could be several important learnings from the market leading position and the existing 12 OEM end customers. These learnings could speed up the processes for new OEMs, and might be an important competitive edge, considering the general sense of urgency in the DMS market.
Moreover, we believe Smart Eye has an important edge in having had its local China office operational prior to the pandemic, in comparison to non-Chinese entrants. The end customer is Smart Eye’s third Chinese OEM, but the company has a strong traction in all markets. Speaking of geographies, we believe the rumors of Smart Eye&#8217;s design wins being China-exclusive are complete nonsense. Having separate strategies for different countries does not make much sense, in our view. On the contrary, car OEMs take every chance they get to become more efficient and improve their low margins. Hence the importance of the platform strategies.
The stock is up about 440% from the bottom closing price of SEK 44 on March 18; the day before <a href="https://www.redeye.se/research/585806/smart-eye-all-hail-king-dms">the design win spree</a>. We not only maintained our valuation of SEK 153 (raised to SEK 160 on March 20) throughout the Corona crisis, but also increased it several times during 2020, as the company’s traction grew stronger and stronger. Today, the stock is trading on levels around our base case of SEK 241.