Net Sales came in at SEK11.0m, 22% Y/Y, slightly below our estimates of SEK12.0m. EBITDA came in at -SEK9.0m, corresponding to an EBITDA margin of -82% (EBITDA -SEK7.2m, EBITDA-margin -80% last year). Thus, slightly below our estimates of -SEK7.3m. The main reason for the deviation is lower sales than expected, as OPEX came in somewhat lower than expected.

Gapwaves’ cash and cash equivalents at the end of Q4’22 was SEK185.4m, and the Company has no debt. Cash flow from operations was SEK8.3m in the quarter, driven by changes in working capital. We think it is in a very comfortable position to continue investing in R&D, production, personnel, and more, over the coming years.

The content story in automotive is in its early inning. indie Semiconductors estimates that the current semiconductor content in cars is around USD500, which it expects to grow to over USD4.000 in the “future.” We believe the “future” refers to the 2030 timeframe. According to indie Semiconductors, Safety systems and EVs will stand for most of the TAM expansion, growing at a CAGR of 25% and 28%, respectively, between 2021 and 2026. We believe Gapwaves radars would fall under the Safety system label.

Content growth will be a large part of the expansion in TAM; Gapwaves has presented at Redeye’s Smart Cities event, predicting that the number of sensors per car will grow from three in SAE Level 1 autonomous vehicles to 6-10 for SAE Level 5 autonomous vehicles.

Yole forecasted the TAM for radars modules in passenger cars (PCs) and light commercial vehicles (LCV) will grow at a 19% CAGR between 2020 and 2025, growing to USD9.1bn from USD3.8bn. Yole expects most of the growth to come from unit increases which are forecasted to increase two times over the same period, while average selling price (ASP) is expected to fall by 20%.

Segmenting the radar market by frequency band, Yole predict that the W-band (75GHz–110GHz) will grow even faster at a 27% CAGR, reaching USD10.4bn from USD3.1bn between 2020–2025. While the two figures are not directly comparable, Yole expects the W-band to be the primary frequency brand for automotive. These figures demonstrate the growing potential of the automotive industry in terms of semiconductors, an area for which Gapwaves is particularly well positioned.

While the consumer market is significantly smaller than the automotive, Yole forecasts it will grow to USD0.2bn between 2019 and 2025 (70% CAGR). For consumer-related products, Gapwaves has one “tech giant” who has placed NRE orders worth cSEK20m, and another “tech giant” is trialing the products for autonomous last-lime delivery robots. The latter customer is buying the radars via Gapwaves Uhnder distributor. In our forecast, we have named these “new radar verticals.” We believe this segment offers much better pricing and a faster time to market as it does not have the same quality standards required for the automotive industry.

Veoneer, the manufacturer and supplier of automotive electronics and safety products and a Gapwaves’ customer, has had a turbulent 2021–2022 by first reaching a merger agreement with Magma for SEK30.4bn (USD3.5bn) in cash, representing a 43% premium over the weighted average price for 30 days. Veoneer was supposed to strengthen Magna’s advanced driver systems portfolio and industry position by complementing Magna’s existing products and capabilities. While about 40% of the votes favored the agreement, Veoneer later terminated the transaction and subsequently entered into a definitive agreement with a private group led by Qualcomm and SSW Partners. The group offered SEK35.6bn (USD4.1bn) in cash, representing an 87% premium to Veoneer’s July 22, 2021, closing price and an 18% premium to Magna’s competing offer.

After Qualcomm and SSW Partners acquired Veoneer, Magna agreed on December 20, 2022, to purchase the business and assets related to active safety business from Veoneer, ultimately owned by Qualcomm and SSW Partners, for SEK15.8bn (USD1.5bn) in cash, subject to working capital and other customary purchase price adjustments. Magna funded the transaction through cash on hand and through a debt facility. The acquisition enables Magna to broaden its ADAS sensor and full systems capabilities. The deal is expected to close near mid-year 2023, subject to certain regulatory approvals and other customary closing conditions.

We are unsure what this means for Gapwaves. However, Magna has collaborated with Uhnder since at least 2018, when Magna announced its ICON radar. Uhnder also has had a partnership with Gapwaves since 2020. Moreover, Magna’s management said that Magna’s rearview and front camera complement Veoneer’s radar and domain controller, which combined form a comprehensive product portfolio. Thus, we think Magna’s acquisition could result in Gapwaves’ radars being adopted by Magna as well. However, Veoneer’s short-term performance could weaken as its management might be distracted. While a risk, we find it unlikely to affect Gapwaves directly.

In our opinion, Gapwaves has three extensive agreements with automotive suppliers that have the potential to generate revenues in the tens to hundreds of millions of SEK over the next few years. We expect Gapwaves’ near-term financials to have fluctuating revenue and cash flow profiles until these agreements go into production. As a result, we do not place too much emphasis on quarterly financials.

Gapwaves has three main customers currently: Hella, Bosch, and Veoneer. Hella and Veoneer have licensing agreements where Gapwaves earns a royalty. With Bosch, Gapwaves will be responsible for the production. In our opinion, controlling the manufacturing poses the most significant risk while raising the potential earnings for Gapwaves.

We expect Veoneer to ramp slowly, starting in 2023, reaching 2m units in the first year and 4m in 2024. We expect sales towards Hella to ramp up in 2024, reaching 6m units in the same year. Since Gapwaves is responsible for the production of Bosch, we expect a better margin profile. However, according to management, production is expected to start in 2026. We expect Gapwaves to deliver 0.06m units in the same year while reaching 0.25m in 2027. In the Q4’22 report, management reiterated start of production is going according to plan for Hella and Bosch while leaving no commentary on Veoneer. During the quarter, Frencken Group, an established producer in the automotive industry and production partner for Gapwaves, installed a production line. The Production Part Approval Process (PPAP) has begun for Hella, ensuring the supplier achieves the necessary production quality.

We have not made any estimate changes, and our quarterly estimates for 2023 look like the following. We want to highlight that Gapwaves’ financials are expected to fluctuate, and investors should not emphasize the quarterly projections in isolation.

Compared to sizeable international semiconductor companies with automotive exposure, Gapwaves trades at a significant EV/S premium for 2022e–2024e. We find a premium justified as Gapwaves’ growth potential is much higher. However, we also note that Gapwaves is unproven, unlike this peer group. Our other peer group mainly includes Swedish companies with unproven products but high expected sales growth. Gapwaves still trade at a slight premium on EV/S for 2022e. We find a small premium to this group justified as we believe Gapwaves’ potential is closer to being realized. On a longer-term DCF valuation, we still find Gapwaves shares attractive as it has a solid pipeline of tier-1 customers ready to scale volume production.

We are surprised by the share price development since the end of the last quarter as the Company is well-positioned for the future with a strong balance sheet and a solid customer list. Once the market’s “short-termism” recedes and the Company progresses towards profitability, we believe the share price will close in on our base case.

Recently, Redeye has made a substantial update to its rating model. As a result of these changes, companies now need to meet a higher threshold to receive a favorable rating from Redeye. The new rating model resulted in Gapwaves losing one point in business (new: 3, old: 4) while gaining one point in financials (new: 2, old: 1). The net effect is zero, and we keep our discount rate of 11.5%.