I’ve had a bunch of questions about this teaser pitch over the past month or so, and it’s still circulating (and the stock is still around $10), so I thought we’d dig in and see what answers we can provide.
Here’s how the ad starts:
“How to buy $10 shares in this driverless car disruptor BEFORE it IPOs
“One little-known, pre-IPO ‘computer vision’ company is rumored to be Tesla’s main supplier in self-driving cars.
“Use this simple code (US4563572019) to buy pre-IPO shares for as little as $10”
That “simple code” does actually “give away” the answer, if you know where to look, that’s the ISIN number for the security… but we’ll persist with the detective work anyway, just to be sure. More fun that way.
(The ISIN is not a secret code you would use for unearthing great investments, if you’re curious, it’s just a unique identifier that all tradable securities have — more like a globally recognized barcode number for a particular investment that helps keep things organized. Every stock, bond, warrant etc. has an ISIN. If you’re familiar with the CUSIP number, the international standards body just creates the ISIN for US stocks by adding “US” in front of the CUSIP and putting a random number at the end.)
The pitch goes on to say this…
“Most investors have no idea this backdoor exists.
“If you’ve got $10…
“You can buy pre-IPO shares in tiny, early-stage tech companies…
“BEFORE they potentially shoot up 150%–250% or more when they go public.
“Reuters calls it ‘Wall Street’s Biggest Gold Rush.'”
And you, of course, are NOT one of those investors who has “no idea.” This is just a general reference to Special Purpose Acquisition Corporations (SPACs), which are often called “blank check” companies, and you’d have to be buried under a rock to have not heard of the SPAC mania that has coursed around the market over the past year, with new records being broken every day as hundreds and hundreds of new SPACs have raised money and set themselves loose on the world, searching for an attractive mate to merge with.
That SPAC enthusiasm crested with the market in February and March, so new listings and the mania have cooled a bit, at least for now, but there are still hundreds of “blank checks” floating around… which means that there are hundreds of stories that might be told about “pre-IPO” ideas, and the newsletter guys know that investors loooooove the idea of buying pre-IPO stocks. Even if they’re not really “pre-IPO,” they’re just pre-merger and pre-name change.
I went into a lot more detail about what SPACs are a few weeks ago, when I was writing about a different teaser from the Manward folks, so I won’t bore you by repeating that — you can check it out here if you want more background.
This time the “#1 SPAC to Own Today” pitch is from Justin Spittler at RiskHedge, and he’s using that promo to sell subscriptions to his IPO Insider ($2,497, no refunds), which presumably will be recommending lots of SPAC deals.
Which one is he specifically teasing? They already dropped those big hints, the “simple code” and the rumor that Tesla might be a customer, and they also say that it’s a pretty small company…
“And the company behind US4563572019 is unmatched…
“Right now, its pre-IPO valuation is around $700 million.
“That’s just 0.1% the size of Tesla.
“It’s almost laughably small for a company that could soon have its technology in nearly every car manufactured.”Are you getting our free Daily Update
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I feel like I should run a highlighter over those words “could” and “nearly” — those are the words the legal department loves to add to a promo, because using words like that means you can spark that “greed” impulse in readers without really promising anything.
And the time is coming fast…
“This opportunity is currently in its golden window, where you can buy pre-IPO shares.
“It will likely go public in June or July at the latest.”
So what’s this stock?
Thinkolator sez our teaser stock here is Arbe Robotics, which is in a pending deal to go public through a merger with the SPAC Industrial Tech Acquisitions (ITAC), announced on March 18. That would have been pretty sexy news six or eight months ago, but investor lust for SPAC deals has cooled quite a bit, even for those that are in hot sectors like autonomous driving or electric cars, and the stock has just bumped along near that $10 price over the past few months, waiting for the shareholder vote and the final merger announcement (SPACs rarely fall much below $10 pre-merger, since the SPAC shares can be redeemed for the trust fund cash that should amount to roughly $10 if you elect for that before the deal is consummated… so trading right at $10 now is about as “meh” as you can get for a pending SPAC deal… and a lot of them are seen by investors as “meh” right now).
And that means people seem to again be moving with a little caution, and paying some attention to financials, which is good, so don’t worry about “missing the deal” — it’s still trading at about the SPAC trust fund price ($10.10 a share is what the company says is in their trust fund, in this particular case), and that won’t necessarily change in a hurry even after the deal is completed (investors already know the deal is coming, of course, so any enthusiasm for Arbe should already be “in the price”… but any pessimism could be masked right now by the $10 redemption promise). So you’ve got time, you can take a little pause here and read the Investor Presentation they filed with the SEC on March 18. I haven’t seen any announcement of when the shareholder vote (and that redemption event) will be, the announcement indicated “late second quarter or early third quarter,” so that would mean “June or July,” most likely, but they do sometimes get drawn out a bit.
Arbe is quite young, founded in 2015, but says they’re the “leader and first mover in 4D imaging radar technology with superior resolution and significant cost advantage over the competition,” and that they have a lot of “active engagements” and both a “visible revenue forecast” and a “tangible near-term revenue opportunity.” Which probably means they haven’t sold anything yet, so we’ll start out with our skeptic’s eyeshade on.
Like AEye (merging with the CFAC SPAC, they intend to have the ticker LIDR), with its “LiDAR on a chip” that can do 4D imaging, Arbe claims that their 4D system will more efficiently track movement of objects, which will improve safety, and that their system built into a chipset will save costs. They do have a partnership with a big tier 1 auto supplier, Valeo, and they believe their systems will be in production by the end of 2021… and they do say they have a purchase order from a global OEM (maybe Hyundai, which is an investor in Arbe, but they don’t disclose), and they say that “vehicles with Arbe based systems go into production” in late 2022.
Which strikes me as absurdly fast for a company whose chipsets won’t even be in production until late 2021, auto makers are generally very conservative about rolling out new technology to production cars (those chips and sensors will be relied on as safety devices for at least a dozen years, so the cost of failure is high), but that’s what they say… they imply that this first production project is for an “autonomous ground vehicle”, which I would guess is more likely to be something like a robotic forklift than anything that drives around human beings on the streets, but we’ll see. They say “automotive grade” production will be “in the 2022E timeframe,” so the 6,000 chips they expect to sell this year are mostly for testing-type projects, I imagine (they think that will bring in $8 million in revenue).
Arbe thinks they’ll have $312 million in revenue in 2025, about 2/3 of which would be from automotive (the rest mostly from those “autonomous ground vehicles”). The current implied valuation of the company is only about $700 million, so that is, at least, a far lower price/hypothetical sales valuation than most of the LiDAR startups are getting at the moment — whether that’s because investors don’t know this company, prefer LiDAR, or just think Arbe Robotics is blowing smoke about their five year projections, I don’t know.
The interesting thing about Arbe is this push for radar and camera sensors instead of the much more expensive LiDAR sensors, probably mostly because radar and cameras are commercially available now, and pretty cheap… and they do throw an Elon Musk slide into their presentation, since he has been the biggest critic of LiDAR and insists that full autonomy is possible with just cameras and radar. Tesla is always rumored to be testing LiDAR as well, perhaps behind Elon’s back, but all of the stuff we currently rely on for lane changing on the highway, parallel parking, or emergency braking is based on radar and cameras and works pretty well for the stuff that’s pretty widespread today, what we’d call “Level 1” and “Level 2” autonomous driver assistance, and that will probably be the case for at least the next few years… if only because the equipment is so much cheaper.
The challenge we’ve come to understand for SPACs over the past year or two, though, is that they sometimes have to try really hard to justify these deals by convincing investors to evaluate them not on current revenue or even on contractual future revenue, but on projected deals that they think they’ll have, with possible customers who they’re talking with but haven’t actually received a commitment from yet, and on forecasted revenue that they anticipate coming in as a result of those deals in four or five years.
You will almost never see an analyst or an investment pundit justify even a technology growth company that’s a zero-revenue investment based on forecasts five years from now, with the possible exception of biotech, most public companies have at least some established level of revenue before they go public, and often very good revenue growth — maybe not profits, but at least sales. Most technology companies with long lead times and no actual product sales remain private these days until they’re a little more proven, or get bought out by one of their customers or strategic partners, but this new enthusiasm for SPACs is giving us that venture capital feeling of getting in before a company’s product is even available for sale… and therefore, I worry, they may also bring us that venture capital failure rate.
Optimism is a requirement for being a growth investor, and if you want to bet on big changes and believe in great little growth companies you have to take a leap of faith from time to time, but if you do a lot of that you’re taking a lot of risk. And if you’re new to this kind of thing, it might not feel like a lot of risk because of those encouraging investor presentations that talk up their forecasted revenue.
In this case, Arbe thinks they’ll be selling 2.8 million units by 2025, and bringing in $312 million in revenue. That would be about $110 per unit sold, which is roughly what they say “level 2” radar chip sensors cost, and they anticipate three units per car for Level 2 autonomy, so that’s maybe a million cars with their technology being sold that year. There will probably be something like 83 million cars sold this year worldwide, so if that rises to 100 million by 2025 that would mean Arbe gets built into 1% of new cars. Sounds possible, I guess, but that’s the context we’re dealing with and I’m sure that none of the SPAC merger LiDAR or other tech companies like Arbe are making conservative projections — there’s much more incentive for a SPAC target and a SPAC sponsor to be optimistic and gin up interest than there is to be conservative and close a deal at a lower price (the target wants a maximum valuation, of course, and the SPAC sponsor gets free shares and warrants so is incentivized to generate investor enthusiasm, not to drive a hard bargain).
That might be a little too harsh, to be fair — AEye’s deal with CF Finance Acquisition (CFAC), announced back in February, actually got negotiated down a little bit after the other SPAC LiDAR deals came under some pressure, perhaps in part to discourage SPAC redemptions, so AEye now has an implied valuation of $1.5 billion, down from $1.9 billion (at the point of merger, the SPAC shareholders have the right to pull out and get their ~$10 back if they don’t like the deal — and they can also vote down the deal completely, which would make the sponsor have to postpone his dreams of a dive in Scrooge McDuck’s Money Bin). That puts things into some context, compared to Arbe, AEye is projecting a little bit faster growth, and is also on pace for trivial revenue numbers in the next couple years, but thinks they’ll have $290 million in revenue in 2025, so if you’re going off of these (really shouldn’t be trusted) 2025 projections, AEye is valued at about 6X 2025 revenue and Arbe at about 2X 2025 revenue.
(I looked at a whole bunch of the LiDAR SPACs back in March, by the way, and shared some quick thoughts on them in a different piece about an Ian King teaser… AEye just comes to mind because it’s also relatively small and claims that “4D” moniker).
And to sweeten the pot, if you want that, Arbe’s initial investor presentation also predicted that they will be profitable by 2023. If that turns out to be true, which I’d say is a very large “if,” then they’re valued right now at ~70X 2023 earnings, and maybe they can end up justifying that and growing into the deal… but boy, for a company that doesn’t yet have any products on the market that still feels awfully optimistic. I’d want to understand more about where those forecasts are coming from.
Is Arbe working with Tesla? I don’t know. There have been quite a few stories and “leaks” about that, referencing Arbe/Tesla connections in some of Tesla’s software updates and the general appeal of an improved radar sensor that would give LiDAR-like or better results without forcing Elon Musk to admit that LiDAR is OK. Elektrek covered that story pretty well back in October, though there were also stories a couple weeks ago about Tesla dropping radar entirely. On the other hand, if someone’s going to be first to roll out a new kind of radar sensor, it will probably be “caution to the wind” Elon.
Will they be in “every car” in the future? That’s awfully hard to imagine — yes, Arbe does claim in their presentations that their radar sensors and associated technology are better than the existing offerings, but those existing and future offerings are from both other startups and, probably more importantly, from giants like Intel’s Mobileye, Infineon, Texas Instruments and NXP Semiconductor. The small fellas in that group, Infineon and NXP, have market caps of over $50 billion, have a very long history of leadership in automotive semiconductors, and are not sitting still and waiting for others like Arbe to innovate or take market share.
It’s hard to break into the market in any business, it’s tough to sell a chip to Apple or Samsung or any other electronics manufacturer… but it’s a lot harder to sell a new chip or a new technology to an automaker, who has to design it into products that might take four or five years to develop and be on the road, impacting their reputation, 20 years from now. If your iPhone fails, nobody dies and you get a new one, no big deal… if your sensors fail and you hit a pylon or a pedestrian, as Tesla and others have seen a few times, or if they stop working after being in the rain for a few years, it’s a big deal.
That doesn’t mean it’s impossible, of course, and innovation has sped up dramatically in the automotive sector in the past decade… it just means it’s hard. Arbe won’t have anything handed to them. I wish them the best of luck, but won’t be participating in this SPAC deal… if they’re going to change the automotive world, the current SPAC price is telling us that the enthusiasm is not bubbling over just yet.
We’ve probably got plenty of time to wait for them to at least make a few real sales, or see how comfortable you can get with those 2023-2025 forecasts, before we decide they’re worth an investment.
And yes, I’ll breathe deep and accept that I’m wrong if they go on a 500% run in the next year because they get built into the next Tesla model and investors get excited. Having a little investment discipline means being OK with “missing out” sometimes.
So… interested in this next-gen radar SPAC? Feeling bruised from the crash of so many of those EV and LiDAR SPACs? Let us know with a comment below… and thanks for reading!
P.S. If you’re interested in the higher risk/higher reward version of this, there’s also the SPAC warrants — if the deal goes through, the warrants that were attached to the initial SPAC units will be activated, five year warrants to buy the shares at $11.50 each. Those warrants trade separately now, at ITACW, and they’re priced around a dollar — which means warrant buyers are betting that the deal will go through (if the SPAC fails to ever make a deal and they have to return the money in a year or two, whenever the deadline is for this particular SPAC, then the warrants would expire worthless). That price means you need the shares to reach about $13 before the warrants make more money than the equity, but if Arbe turns out to be a steady grower over time, or investors get excited and bid it up dramatically, then the warrants will be way more exciting. A very real “100% loss” potential, and a 1,000% gain potential if the shares shoot up into the $20s (there is an early expiration clause, so if the shares trade above $18 for a few weeks the warrants might get called, or redeemed for a penny if you’re not paying attention — warrants are not passive “buy and forget” speculations).
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