CYNGN Inc. (CYN) appears to be hiring business-developed professionals from companies that were recently acquired by Tesla (TSLA). In addition, CYN’s autonomous vehicle solutions could also be useful for building predictive maintenance systems. Under my most optimistic assumptions, a WACC of 15%-10%, and a DCF model until 2035, CYN could be worth close to $45 per share. In my view, as soon as traders perform more due diligence, the market will most likely realize that the shares are a bit undervalued at $7.5-$10.
Founded in 2009, CYNGN offers clients to tap into greater efficiency, safety, and productivity with Cyngn’s Autonomous Vehicle solutions:
Thanks to the market opportunity, notice that the company’s valuation is close to 119 billion. CYNGN is also entering into many markets that grow at a double-digit rate. The company is still developing its DriveMod autonomous driving solution, but when everything is ready, revenue will most likely trend north at a very decent growth rate.
Source: Company’s Website
CYNGN’s DCF Model Based On The Tesla’s Revenue And FCF
CYNGN Inc. is currently building a go-to-market ecosystem that will enhance sales growth in the near future. By collaborating with industrial vehicle OEMs, The company expects to use the connections created now to drive demand for the company’s products in the near future. In my opinion, even without seeing significant sales growth in 2021-2023, the management will be generating relationships to drive up sales from 2025.
CYNGN Inc. announced in the last prospectus that DriveMod had been installed in several vehicles, and one deployment was on payment. Taking into consideration these facts, I believe that the company will soon report significant sales growth:
We have already deployed DriveMod on multiple vehicles that are commonly used in these applications. These vehicles were deployed as prototypes or as a part of a proof-of-concept project. Of these deployments, two were at customer sites, and of which, one was paid. Source: prospectus
That’s not all. I believe that a small increase in sales and marketing infrastructure would most likely lead to significant revenue growth. Take into account that DriveMod can be used in close to 33 industries including mining, construction, yard operations, and agriculture. If CYNGN Inc. makes generalistic sales and marketing campaigns to different industries, sales and FCF would most likely trend north.
In order to design my DCF model, I studied carefully the members of the management. Among individuals coming from Facebook (FB) and Baidu (BIDU), I found Mr. Landen, who was in charge of Business development at DeepScale:
Source: Cyngn Presentation Deck
DeepScale, Inc. is an American tech company developing automated vehicles. Things turned very interesting when I found out that DeepScale was acquired by Tesla for an undisclosed amount. Considering this fact, I believed that learning about TSLA’s sales growth to run my CYNGN’s financial model makes a lot of sense.
That’s not all. DeepScale received $15 million from Point72 and other venture capital firms. With this information in mind and Mr. Landen inside the management, it seems a bit more likely that CYNGN Inc. receives financing:
Previously, DeepScale raised $15 million in a series A round led by Steve Cohen’s venture fund Point72, and Siemens-backed venture fund next47, and a $3 million seed round from Sun Microsystems cofounder Andy Bechtolsheim, Code.org co-founder and investor Ali Partovi, and Jerry Yang’s AME Cloud Ventures among others. Source: CNBC
With regards to the sales growth, I also took into account that the industrial automation market is expected to grow at a CAGR of 9.3% from 2020 to 2027. Under my most basic case scenario, I believe that CYNGN’s sales growth may not be much larger than 9.3% y/y:
The industrial automation market is expected to record a CAGR of 9.3% from 2020 to 2027 to reach $306.2 billion by 2027. Source: ResearchAndMarkets
With that, the global autonomous vehicle market size is expected to grow at a CAGR of 42.6% from 2019 to 2026. It means that CYNGN’s sales growth may grow as much as 42.6% from 2019 to 2026. I wanted to highlight these figures so that readers understand that my figures are very moderate:
On the other hand, according to Allied Market Research, the market could reach from $54.23 billion in 2019 to $556.67 billion in 2026 with a CAGR of 39.47%. It also estimates that Europe would exhibit the highest CAGR of 42.6% during 2019-2026. Source: Allied Market Research
Tesla was founded in 2003, and it reported revenue of $400-$1600 million in 2013-2014. CYNGN Inc. was founded in 2009, so I believe that the company may report significant revenue from 2022 to 2025.
Finally, TSLA’s FCF/Sales stands at 8%-9%, which means that investors will most likely be expecting CYNGN Inc. to reach that level of FCF margin:
Source: Ycharts FCF/Sales
My figures are shown in the image below. They include sales growth of 9% from 2030 to 2035 and FCF margin of 9%. Notice that I don’t believe that I have sufficient information to establish a beta for a CAPM. The shares started to trade not a long time ago. I used a WACC of 15% from 2021 to 2023 and 10% from 2024 to 2035 because I am comfortable with that level of discount. CYNGN Inc. is an emerging company, and it is always good to be cautious while choosing the WACC:
Source: My DCF Model
If we use a terminal FCF of $45 million and an exit multiple of 17-18xm, the fair price stands at approximately $11:
Source: My DCF Model
Data And Predictive Maintenance Could Imply A Valuation Of $45 Per Share
There is another clear revenue catalyst that should be studied very carefully. CYNGN has access to a significant amount of data, which clients can assess. The company discloses on its website that software engineers could use the data to run predictive maintenance and other automatic tasks:
According to several experts, the Global Predictive Maintenance market is expected to grow at a CAGR of 26.1% from 2020 to 2027. If we take into account this market, the company’s sales growth may increase a bit more than that in the previous case scenario. I used sales growth of 25.5% from 2028 to 2035.
The Global Predictive Maintenance Market was valued at USD 4.1 Bn in 2020 and is expected to reach USD 21.2 Bn by 2027, with a growing CAGR of 26.1% during the forecast period. Source: Predictive Maintenance Market
With data management and predictive maintenance, I would be expecting FCF margin of 10%. If we also use a WACC of 10%-8.5%, the DFCF would grow from -$5.5 in 2027 to close to $40 million in 2035. The image below offers more information about my other assumptions:
Source: My DCF Model
Putting everything together, with an exit multiple of 20x and terminal FCF close to $155 million, the implied enterprise value would be equal to $1.165 billion. Finally, the fair price would be equal to $45:
Source: My DCF Model
I Am Not Concerned About The Company’s Financial Obligations So Far
As of June 30, 2021, the company reported $3.4 million in cash and an assets/liability ratio of 2x. In my opinion, CYNGN Inc. will need to raise a significant amount of funds to deliver the sales growth that I assumed above. With that, right now, I am not really worried about the company’s contractual obligations:
CYNGN Inc. reports only $1.5 million in cash, and total liabilities worth $1.9 million. I will be expecting significant stock demand if the company can sell equity, and does not report more notes or convertible notes:
If CYNGN Doesn’t Deliver A Significant Amount Of Revenue By 2024, FCF Expectations Would Decline Significantly
CYNGN Inc. is still developing its autonomous driving technology, and expects to commercialize massively from 2024. Notice that my DCF model includes these assumptions. With that, many things could go wrong. As noted in the documentation given by CYNGN Inc., the management cannot assure that by 2024 the company will have a product that will produce the sales expected by the market. If the revenue delivered in the future is lower than expected, many traders will sell shares, and the share price could decline:
Our autonomous driving technology is currently available as a private beta release, during which phase, we will prepare for scaled commercialization in 2024. We incurred net losses of ($3,643,395) and ($4,313,912) for the six months ended June 30, 2021 and 2020 and, ($8,338,807) and ($9,335,174) for the years ended December 31, 2020, and 2019, respectively. We have not recognized a material amount of revenue to date, and we had accumulated deficit of ($112,337,396) and ($108,694,001) as of June 30, 2021 and December 31, 2020, respectively. We have developed and tested our autonomous driving technology but there can be no assurance that it will be commercially successful at scale. Source: Prospectus
Currently building a go-to-market ecosystem and targeting markets that grow mostly at a double-digit, CYNGN Inc. is worth $11 per share under my base case scenario. However, if CYNGN develops systems that learn from data and successfully builds predictive maintenance systems, I would say that the fair price is close to $45 per share. Note that I am using a conservative WACC of 15%-10%, and conservative sales growth rates. With all these in mind, in my view, the company looks quite undervalued at the current market price of $7.5-$10.