Both the balance sheet and the expected revenue show that Foresight Automotive Ltd. (FRSX) experiences significant business growth. Most investors didn’t seem to be noticing the expected sales growth in 2023. In my view, when more market participants learn about the revenue expectations, Foresight Automotive will trade at more than 5x forward sales. Other competitors trade at 2x-230x. The Board reacted very recently by trying to sell shares of the subsidiary Eye-Net Protect in the NASDAQ. It is a brilliant idea that may enhance the company’s valuation.
Foresight Automotive
Founded in 1977, Foresight Automotive Ltd. is a developer of smart vision software solutions and cellular-based applications. We are talking about technology that offers not only conventional cams, but also thermal cams, depth maps, and other sophisticated detection techniques. Soon, driving will never be the same:
Source: IR
Source: IR
I learnt from public conversations with the CEO that FRSX is different from other vendors because of its dense three-dimensional (3D) point cloud. The company’s 3D technology provides minimum false alerts and maximum accuracy not only for autonomous vehicles, but also for defense, rail industry, and heavy industrial equipment applications:
Source: This Innovative Israeli Tech Company is Set to Disrupt $30B ADAS Market
Source: This Innovative Israeli Tech Company is Set to Disrupt $30B ADAS Market
The advanced driver assistance systems’ market is expected to increase from $27 billion in 2020 to $83 billion by 2030. Experts foresee that the market will grow at a CAGR of 11.9%, which is great for FRSX. If the market grows at a significant pace, the company will most likely see its revenue growing. We will see that most market analysts expect the company’s revenue growth to be more than 11.9%. With that, knowing that the company operates in high growth market is beneficial:
Source: ADAS Market Size, Share, Growth, Analysis, Trends by 2030
The Balance Sheet Shows That The Business Is Growing
In 2020, we did not see sales, which is not ideal. With that, the balance sheet did show significant business growth. On March 31, 2021, cash and short term deposits were equal to $56 million, which is close to ten times the figure reported in March 2020. The total amount of assets also increased from $15 million in 2020 to more than $63 million in 2021. In my opinion, investors are providing cash to the company because they believe in the project. There is a demand for the stock:
Source: 10-Q
While the total amount of assets is increasing at a large pace, total liabilities are approximately the same. The company’s total asset/liability ratio increased from 5x to 11x. It means that the company is financing its operations with equity. The management does not need the banker for financing because shareholders offer money to the company. In my opinion, this is overall a sign of a business that grows:
Source: 10-Q
2023 Sales Expectations Are Equal To ILS111 Million
In the three months ended March 31, 2021, the company reported $2.6 million in R&D, $0.4 million in marketing and sales, and an operating loss of $4 million. The company is a start up, so the expected sales figures matter the most. With that, I would like to mention that I expected the marketing and sales expenses to be much larger in 2021 than that in 2020. It is not the case. If FRSX wants to deliver significant sales growth, it will need to invest significantly in marketing. It is a bit worrying that the company is not doing it:
Source: 10-Q
Expectations for the year 2023 seem to be a bit optimistic. Market analysts believe that the company will deliver 2022 sales of ILS14 million or $34 million, and 2023 revenue of ILS111 million. The EBITDA margin expected is also extremely beneficial. In 2023, analysts believe that the company will deliver an EBITDA of ILS21.7 million or $6.6 million:
Source: Market Expectations
If we assume an enterprise value of $200-$230 million, FRSX trades close to 5.8x sales. The company expects to deliver sales growth of 660% in 2023. In my opinion, if sales growth continues at the same level in 2024 and 2025, FRSX appears cheap. Notice that a few months ago, the company had an enterprise value that was three times that of today:
Source: Fundamental Chart Creator (ycharts.com)
Other technology companies operating autonomous vehicles report higher EV/Sales ratio. There are various players in the ADAS market. Their EV/Forward Sales ratio is between 2x-230x with the median being at 5x-6x forward sales.
Source: Ycharts
FRSX seems cheap as compared to its peers since the company’s expected sales growth is larger. In my opinion, most market participants don’t know that the company expects to report sales growth of 660% in 2023. If they knew, the liquidity in the market would have been more significant. As a result, the company could trade at 10x-12x or even more.
Source: Ycharts
Risks
FRSX helps drivers avoid accidents among many other services. Undoubtedly, the company will most likely receive claims from customers and drivers. The company will have to obtain product liability insurance, which could be expensive. Both the insurance and the potential claims could decrease the company’s EBITDA margin:
Any claim brought against us, regardless of its merit, could result in material expense, diversion of management time and attention, and damage to our reputation, and could cause us to fail to retain or attract customers. Currently, we do not maintain product liability insurance, which will be necessary prior to the commercialization of our products. It is likely that any product liability insurance that we will have in the future will be subject to significant deductibles and there is no guarantee that such insurance will be available or adequate to protect against all such claims, or we may elect to self-insure with respect to certain matters. Source: 20-F
The company received financing from the Government of Israel, which is a great news. I appreciate that the company’s technology received such a distinction. The fact that the company received support from the Government will help FRSX sustain growth. As a result, large organizations will most likely trust FRSX. With that, I need to note that FRSX will have to pay a certain amount of money to the Government. Besides, FRSX may face difficulties in transferring the know-how accumulated outside of Israel:
Magna’s research and development efforts related to the technology assigned to Foresight Automotive have been financed in part through royalty-bearing grants in an aggregate amount of approximately $646,000 received from the Israel Innovation Authority, or the IIA, as of March 21, 2021. As of December 31, 2020, our contingent liabilities regarding IIA grants received by us were in an aggregate amount of $661,000. Source: 20-F
When a company develops know-how, technology or products using IIA grants, the terms of these grants and the Research Law restrict the transfer of such know-how, and the transfer of manufacturing or manufacturing rights of such products, technologies or know-how outside of Israel. Source: 20-F
If Eye-Net Mobile Starts To Trade In The NASDAQ, The Valuation Will Most Likely Increase
I believe that the Board Of Directors knows that FRSX appears to be undervalued by the market. In order to increase the valuation, they decided to sell shares of the company’s subsidiary Eye-Net™ Protect. In my opinion, the move is quite smart. The company will most likely be worth more by the sum of the parts. Keep in mind that investors may be willing to get investment exposure to Eye-Net Protect without investing in other projects. In sum, I expect that the company will receive more liquidity from the market:
Eye-Net™ Protect is an intuitive and easy-to-use mobile application that provides real-time pre-collision alerts to drivers and vulnerable road users. The Eye-Net™ solution suite enhances road safety and situational awareness for all road users in the urban mobility environment by incorporating cutting-edge AI technology and advanced analytics. Source: Foresight: Eye-Net To Pursue Potential Nasdaq Listing | Business Wire
Conclusion
Currently developing technology that will be used in autonomous vehicles, Foresight Automotive is expected to deliver significant sales growth. If market analysts are correct, FRSX is trading at 5.8x 2023 sales, which I believe is cheap. Other competitors don’t expect more revenue growth than FRSX, and trade at 10x sales and even 12x sales. With all these facts in mind, I believe that there is an upside potential in the stock price. Let’s hope that the company can sell shares of Eye-Net Protect in the NASDAQ, which will most likely enhance the valuation of FRSX.
Disclosure: We have no shares and we were not paid to write the article.
