Description

Company Overview

Smart Eye (SEYE SS) is a Sweden-based company that specializes in the development of advanced eye-tracking systems for various applications, including automotive, aviation, and research. Established in 1999, Smart Eye has grown into a leading player in the eye-tracking technology space. Smart Eye has two main segments, the automotive segment and the research instruments segment. The company's technology is primarily used for driver monitoring systems (DMS), which ensure driver safety and mitigate the risks of drowsy or distracted driving.

In its Automotive segment, Smart Eye specializes in developing and supplying advanced driver monitoring systems (DMS) and interior sensing solutions for the automotive industry. These systems use eye-tracking technology, along with other sensor data, to monitor driver attention, behavior, and other factors to improve safety, comfort, and user experience.

Key offerings and activities in Smart Eye's Automotive segment include:

1. Driver Monitoring Systems (DMS): Smart Eye's DMS solutions monitor the driver's eye movements, head position, and facial expressions to detect signs of drowsiness, distraction, or impairment. By analyzing these indicators, the DMS can issue warnings or trigger safety interventions, such as adjusting the vehicle speed or applying the brakes, to help prevent accidents.
2. Interior Sensing: Beyond driver monitoring, Smart Eye's interior sensing technology can also detect and analyze the behavior and activities of passengers in the vehicle. This information can be used to enhance safety, comfort, and user experience, such as adjusting climate control or entertainment systems based on occupants' preferences or needs.
3. Integration with Advanced Driver Assistance Systems (ADAS) and autonomous driving: Smart Eye's DMS and interior sensing solutions can be integrated with other ADAS technologies, such as lane departure warning, adaptive cruise control, and collision avoidance systems, to create a more comprehensive safety and assistance framework for the vehicle. In the context of autonomous driving, the DMS can help ensure the driver remains attentive and prepared to take control when necessary.

In the Research Instruments segment, Smart Eye offers a range of eye-tracking solutions, including both hardware and software, that allow researchers to capture and analyze eye movement data with high accuracy and precision. These solutions are used in various research fields, such as psychology, neuroscience, marketing, human factors, and ergonomics, among others.

Some key offerings in Smart Eye's Research Instruments segment include:

1. Eye-tracking systems: Smart Eye provides a range of eye-tracking systems, such as head-mounted or screen-based devices, which can be integrated into various research setups. These systems capture eye movement data, including gaze direction, pupil size, and blink rate.
2. Software solutions: The company offers specialized software solutions for data analysis and visualization, allowing researchers to process and interpret eye-tracking data. The software enables real-time or post-hoc analysis of eye movements, with features such as heatmaps, gaze plots, and areas of interest (AOIs) for quantifying visual attention.
3. Custom solutions: Smart Eye can provide tailored eye-tracking solutions for specific research needs, such as integrating eye-tracking technology into simulators, virtual reality (VR) environments, or other specialized research setups.
4. Technical support and training: The company offers customer support, training, and consultation services to help researchers optimize their eye-tracking studies and maximize the value of their data.

By providing advanced eye-tracking systems and software in its Research Instruments segment, Smart Eye enables researchers to study human behavior, cognition, and decision-making processes through the analysis of eye movements.

Investment Thesis

1. Market leadership in DMS: Smart Eye has secured 217 design wins from 19 global automakers, solidifying its position as a market leader in the DMS space. The company has consistently outpaced its competitors and is poised to benefit from the increasing adoption of DMS in the automotive industry.
2. Strong regulatory tailwinds: As governments worldwide mandate stricter safety measures in automobiles, demand for DMS technology will surge. The EU's General Safety Regulation, for example, the European Union’s (EU) General Safety Regulations (GSR) mandates all new motor vehicles with four or more wheels, including cars, trucks, and buses, to be equipped with driver monitoring systems from July 7, 2026. In 2024, just one year from now, the DMS will be made mandatory for all newly approved vehicles.
3. As the leading DMS provider with a huge base of design wins in place, design wins will turn into revenue and cashflow in 2025/2026, making the stock more accessible to a broader investor audience

Broadly, the idea here is that Smarteye already has the design wins lined up to show huge revenue growth over the next three years. As design wins get turned into actual car production and revenue in the course of 2024 and 2025, the share price of Smarteye should rerate.

Source: Redeye Research

As the table above shows, Smart Eye is the clear leader in DMS, with Seeing Machines a close second. There is a longstanding debate between Seeing Machines and Smart Eye holders (and both companies are definitely worth a look), but overall Smart Eye seems to be sustaining its market share lead over its main competitor over time. While Smart Eye does not explicitly disclose customers, it is safe to say that their customers include a broad cross section of major worldwide OEMs (we’ll leave the guessing of specific customer names for another time).

Starting in 2024 every car produced in Europe will have to have a DMS. Other global markets are also increasingly moving towards DMS, as it helps prevent drunk driving and drowsiness related accidents and deaths. The exercise from here is to figure out 1) approximate auto production and 2) estimated Smart Eye market share given already won contracts and then make an ASP assumption to project out revenue.

Source: Smarteye

Assuming an ASP of 7 EUR (~78 SEK) and that Smart Eye’s market share slowly declines from 50% to 40% we can assume based on the DMS forecasts that Smart Eye reaches operating profitability in 2024 and start seeing operating leverage kick in in 2025/2026. The 2026 EBITDA number of 418mm SEK demonstrates the high margin and incremental margin nature of the business (this is just a piece of AI software that tracks the state drivers are in). In other words, once automotive production picks up and the existing design wins kick in, very little incremental expenditures are needed. A 35% EBITDA margin does not feel unreasonable here.

Valuation

Valuation is far from an exact science here. Still, we can approach this topic and guesstimate our way to approximate upside/downside in several ways:

1. Assume a 10x EBITDA multiple on the 418MM EBITDA estimate (35% EBITDA margin on 1,195MM SEK in 2026) =4,180MM SEK = 43% IRR from here
2. If we don’t want to put too much weight on EBITDA margin estimates 3 years in the future let’s look at what kind of sales multiple the above numbers would translate into. 4,181MM SEK / 1,195MM SEK = 3.5x sales multiple. At a reduced 2.5x sales multiple the IRR would be about 26% and the valuation 2.4bn SEK.
3. Discount back design wins. Smart Eye specifies that current design wins are worth about 4,365MM SEK. Assuming once again a 35% EBITDA margin and a 20% Swedish corporate tax rate the present value of these revenues with zero further design wins is about 900MM SEK. This is the low case. If we give them credit for the “estimated full revenue over the product life cycle from additional design wins with existing car manufacturers on existing platforms” and PV back 27bn SEK of future revenues at a 35% EBITDA margin and 20% tax rate is about 5.7bn SEK. If we assume that Affectiva and iMotions are still worth what they paid for these two acquisitions that now make up the bulk of the non-automotive segment (730MM SEK and 400MM SEK respectively) we can add about 1.1bn SEK to each valuation case. In other words, case 3 comes with a low end valuation of 2bn SEK and a high end valuation of 6.6bn SEK (compared to a current market cap

Overall the valuation range seems to come out somewhere in the 2.4-4.2bn SEK range using the first methodology and a 2bn-6.6bn SEK range using the second which compares to the current market cap of 1.6bn.

Risks

1. Intense competition: Smart Eye faces stiff competition from players like Seeing Machines, which could lead to pricing pressure and push down ASPs across the industry over time.
2. Slower-than-expected DMS adoption: Slower adoption of DMS in the automotive industry outside of Europe could hinder Smart Eye's growth potential.
3. One final major risk is bad decision making at the corporate level. It is not entirely clear yet whether the expansion into the related research instruments sector through the acquisition of iMotion and Motiva make sense.
4. Further dilutive equity offerings. Smarteye was forced to raise additional capital at a rock bottom valuation once it ran out of cash in late 2022. The company believes they can make it to 2024 with the newly raised cash when profitability is supposed to inflect. The bombed out stock price as a result of the previous raise is part of the opportunity here of course but should they somehow run out of money again this would be a major issue.

Conclusion

Given Smart Eye's market leadership position, regulatory tailwinds, diversified business model, and bombed out valuation, the company presents a compelling long-term investment opportunity. Smart Eye is the leader in the DMS space and already has enough design wins and customers locked in to drive huge revenue growth in 2025/2026. All that’s required to win from here is patience and rational capital allocation from management.

Catalyst

Design wins turning into revenue in the course of 2025/2026