Otonomo Is Creating A Digital Edge Into A Game-Changer Industry

Feb. 22, 2021 3:06 AM ETOtonomo Technologies Ltd. (OTMO)18 Comments
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Summary

  • Software Acquisition Group Inc II (SAII, $11.5 as of February 22nd, 2021). SPAC has announced the merger with Otonomo in a deal worth $1.4 bn.
  • We believe Otonomo is set to gain momentum in the data analysis space because its business model is, in our view, sustainable and might expand into many verticals.
  • Otonomo is addressing 10% of a market expected to be worth $750bn in 2030. Actually, Otonomo relies on 40mln vehicles connected to its platform.
  • Our base case equity value is in the region of $3.5bn and $22.8 per share, and our best-case valuation delivers an equity value of $5.2bn and $33.7 per fully diluted share.
  • Execution is the key risk we envisage.

Note: This article was amended on 2/22/21 to reflect updates to the original valuation.

Investment Idea

We have divided this idea into two main parts. The first one is based on the premise that the Special Purpose Acquisition Corps (SPACs) have a theoretical share price floor of $10 and, therefore, buying near this price supposes a "more secure move" as the price is concluded to go up after the merger is announced and completed if the merged company is valuable. Software Acquisition Group Inc II (SAII) is currently trading at $11.5 per share, which supposes a great upside opportunity according to our valuation of the merger target.

The second one relies upon our valuation approach on Otonomo, which is now sitting precisely at the epicenter of a huge data analysis market and relies on both data and technology to scale up its services from automotive OEMs to others like Insurance, predictive maintenance, fleets, smart cities, and EV services to name a few.

What is a Special Purpose Acquisition Corp.?

We will keep it short and straightforward as readers can easily find lots of information out there about SPACs. These vehicles serve the purpose of making it easier for private companies to go public without going through the demanding and sometimes lengthy process of an IPO while creating an excellent opportunity for the SPACs holders and PIPE investors.

There are three main stages for these stocks:

  • Before the acquisition is announced (pre-merger).
  • Once the merger is publicly declared.
  • After the consolidation is concluded.

As these companies' purpose is to acquire a private firm, SPACs tend to trade near their cash position (equity value equal to cash position) in the early stages, typically near $10 per share. However, the upside potential could be high as they move forward into completing the acquisition.

It could be attractive if investors can enter the stock before the merger is announced. However, the latest implies the risk of buying based on rumors that could not materialize. To this extent, it is important to highlight that the SPAC cash provides a floor to the potential downside. We also highly recommend assessing the SPAC's management quality and vision before owning these securities.

In the case of Software Acquisition Group Inc II (SAII), at the time of writing, the SPAC is trading at around $11.4, which we believe is still a good entry point as the merger with Otonomo has been recently announced at a $1.4bn valuation ($1.1bn Enterprise value + $300 mln cash). After the merger, the ticker symbol for the company on NASDAQ will be "OTMO."

What is Otonomo about?

Based and founded in Israel in 2015, the firm aims to be the most important one-stop platform/marketplace for developers looking to build apps around automobile data.

This whole new sector involves and combines Big Data, IoT (Internet of Things), and all technologies to provide solutions for several use cases, as you can see below.

Source: Otonomo's website

Basically, Otonomo relies on a cloud solution that gets data from its vehicle data platform. Otonomo receives data from connected vehicles. Data are processed before being distributed into an ecosystem of data consumers, a sort of marketplace made of automotive and mobility data.

Once Otonomo supplies the data to the ecosystem, revenues are shared with the OEM like in any other marketplace. Data services and connectivity are becoming a great strategic opportunity for original equipment manufacturers (OEMs), although they are not prepared and equipped to reap this opportunity's benefits. That's why Otonomo is becoming OEM trusted partner.

Otonomo has been able to comply with the needed privacy and security regulation regarding data usage and aggregate and standardize the collected data. They have partnered with more than 16 vehicle OEMs, crunching more than four billion data points from more than 40 million vehicles every day (expected to increase to 258 mln in 2025).

Apart from selling its proprietary data to different developers and service providers, Otonomo's team has built a SaaS suite to address specific services for businesses around the mobility industry. The SaaS services are licensed separately and designed to enable participants to manage all technical issues related to data management.

In 2020, Otonomo more than doubled the number of vehicles connected to its platform, reaching 40 mln cars (expected to grow to 258 mln in 2025). It is now relying on 16 OEMs agreements representing 80% of the global vehicles market.

90% of new cars sold in Europe and the US are connected vehicles and thus are feeding the market for connected services. This market could be worth some $750 bln in 2030. Otonomo addresses about 10% of this market worth some $70 bln ($20 billion for connected vehicle data marketplace and $50 bln for licensed SaaS services).

Data Processing

In the digital world, there are some problems to address in mining, organizing, and curating the information to make it efficiently usable.

Source: Forrester Consulting

As shown in the chart below, Otonomo securely collects, polishes, homogenizes, and refines different data types for its later exploration and analysis by their own SaaS applications and their clients.

Source: PIPE Investor Presentation

Once Otonomo has harvested all these data from over 150 data parameters on each vehicle, they process them. This is a critical part of the business as they have to translate all the data from different OEMs to a single language.

Source: PIPE Investor Presentation

The amount of data is increasing every day. Clearly, as more data Otonomo provides to its platform, more business will be developed.

As mentioned above, the data will be later used for different applications developed by both Otonomo and its clients.

Source: PIPE Investor Presentation

Otonomo Leadership

The firm is the industry leader. It manages data from almost 4x more vehicles than the second competitor. It is the absolute leader in OEMs partnerships with 16 manufacturers from different countries, including BMW Group globally. Together with the number of automobiles, these partnerships give Otonomo a competitive advantage in the current market. Otonomo currently relies on 40mln vehicles connected to its platform. The number of vehicles connected is expected to reach 258mln in 2025.

Source: PIPE Investor Presentation

Otonomo is focused on the industry's most profitable segments, including dealership solutions, fleets, insurance based on vehicle usage, accident detention, to name a few.

Source: PIPE Investor Presentation

Otonomo post-merger

Post-merger Otonomo will rely on above $300 mln in cash to finance the deployment of its five years business plan.

As mentioned above, the pro forma enterprise value of the combined company is $1.1 bln.

We have tried to figure out how management came across this valuation and whether this is consistent with our valuation assumptions.

Being Otonomo’s business model a mix between SaaS software and data marketplace, the management has approached valuation by keeping separate SaaS and Marketplace divisions:

  • SaaS division has been valued using 20x EV/Sales 2025 in the bottom valuation range and 30x EV/sales 2025 in the top valuation range.
  • Marketplace division has been valued using 10x EV/Sales 2025 in the bottom valuation range and 14x EV/sales 2025 in the top valuation range.
  • SaaS and Marketplace divisions are expected to weigh around 50% of total 2025 sales equally.
  • The valuation of both divisions has been discounted to the present at a 20% hurdle rate.

Management came across a valuation range between $3 and $5.5 bn. We show the rough calculation in the tables below. We guess the management came across to figure out Otonomo’s pre-merger value.

Source: Moat Investing internal estimates

Valuation Approach

Otonomo's equity story is a bit different from all other growth companies we have analyzed so far because the merger still has to take place, and thus, for the time being, the business does not exist yet.

Instead of understanding to which extent the expected growth has already been factored into the current share price, we are trying to figure out the fair value the management should deliver on its targets.

Our estimates are based on management guidance until 2025 and on our projections from 2026 to 2028.

Source: PIPE Investor Presentation

The base case scenario

We have value separately SaaS and Market place divisions. Our assumptions below our DCF approach are the following:

For the SaaS business, we have assumed:

  • 192% CAGR in 2021-2028 revenues.
  • 80% Ebitda to FCFF (Free Cash Flow to Firm).
  • A discount rate (WACC = Ke as the company is cash positive) at 10% and a perpetual growth rate of 3%, which, in our view, is even conservative given the high growth nature of the business.

For the Marketplace business, we have assumed:

  • 126% CAGR in 2021-2028 revenues
  • 55% Ebitda to FCFF (Free Cash Flow to Firm)
  • A discount rate (WACC = Ke as the company is cash positive) at 10% and a perpetual growth rate of 3%.

The Ebitda to FCFF conversion might prove to be conservative for both divisions as scaling up dimensionally. Otonomo should optimize its cost structure (management declares a 35% Ebitda margin target in 2025 while our base case assumes 21%).

For the SaaS division, Otonomo, thanks to OEMs' requests, can launch new features that command higher margins. After penetrating the market, which was its primary strategy, Otonomo is now starting to charge for SaaS features.

Based on these assumptions, we estimate an equity value in the region of $3.5bn, which delivers $22.8 per fully diluted share, including 13.8mln warrants (over 100% upside from the current level).

Source: Moat Investing internal estimates

The best-case scenario

We have also prepared a bull case scenario where we have left unchanged revenue projections and FCFFs conversion rate for both divisions and the discount rate and perpetual growth rate.

We have relied on more aggressive Ebitda margin assumptions (35% margin reached in 2025 increasing to 45% in 2028 as highlighted in the table below where we compare the Ebitda projections for the two scenarios.

Source: Moat Investing internal estimates

Based on these more aggressive Ebitda assumptions, we estimate an equity value in the region of $5.2bn, which delivers $33.7 per fully diluted share (almost 200% upside from the current level).

Overall, we see a convergence of our equity valuation range between $3.5bn (base case valuation) and $5.2bn (best case valuation) and the range identified by SAII SPAC investors between $3bn and $5.5 bn.

Our valuation range delivers an EV/Ebitda 2025E between 5.6x and 8.6x against 5.2x and 9.6x identified by the SPAC investors. Although our valuation approach is different, we get to conclusions similar to those reached by SPAC investors. The valuation range is ample because of the uncertainties regarding the business potential and the business plan's deployment.

Source: Moat Investing internal estimates

Risks

Execution: Our investment case relies on the management’s capacity to deliver what they have promised. Small changes in their projections could significantly affect the valuation.

Share capital dilution: The business will be burning cash until it becomes EBITDA positive in 2024, according to the management projections. However, we believe there is a medium risk of potential share capital dilution on top of the 13.8mln warrants already issued.

Barriers to entry: This company and the industry, in general, do not enjoy a strong moat. However, as it happens on other platforms, they have the specific task of building it. However, as they have partnered with big-brand manufacturers and have the highest number of connected vehicles, it shouldn’t be too complicated for them to develop substantial competitive advantages.

Intangibles: The business claims to have 26 patents; however, just one has been granted, and 25 are still pending confirmation. In 2019, SmartCar, one of its competitors, accused them of API plagiarism.

Conclusion

Data analysis is set to change the paradigm in different sectors by efficiently automating processes, allowing managers to take more efficient capital deployment decisions, creating efficiency in the last mile shipping, predicting maintenance, setting marketing campaigns, and analyzing real-time key drivers will select market winners and so on.

Data analysis is also at the intersection of different sectors currently being disrupted (real estate, automotive, e-commerce consumer products).

Otonomo is set to gain momentum in the data analysis space. Otonomo is now sitting precisely at the epicenter of a huge market and relies on both data and technology to scale up its services from automotive OEMs to others like Insurance, predictive maintenance, fleets, smart cities, and EV services, to name a few.

We thus believe its business model is sustainable and might expand into many verticals making its TAM (total addressable market) even bigger and further sustaining its growth.

The current entry price offers a great opportunity to buy this expected disruptive company before it fully deploys its strategy.

This article was written by

Moat Investing profile picture
1.54K Followers
We are a group of experienced investors that like to dig deeper into stocks to find growth stories at a reasonable price with strong economic moats. We also aim to conduct high-quality analysis by deep diving into valuations, key business drivers, risk/reward, and different future scenarios.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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