Ondas Networks: Unclear Trajectory

Summary

• Ondas Networks has strong long-term growth potential through its existing partnerships.
• The timing and magnitude of the company's revenue growth are uncertain, however.
• The balance sheet is very strong with plenty of cash from the recent IPO.

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Ondas (NASDAQ:ONDS) is a provider of private wireless networks for clients in the railroad, utility, oil and gas, and transportation industries. They also serve several government customers.

Source: Company Presentation

Their primary technology is Software Defined Radio (SDR). One of their largest customers are the major Class 1 rail roads like BNSF and CSX because those companies are seeking to replace their outdated equipment with new IOT compatible sensors and technologies all along their tracks, on their engines, at their yards, and everywhere in between in a bid to improve safety and efficiency.

Ondas' products are chosen over the use of existing public Wi-Fi Networks based on LTE, 4G, and 5G largely due to security, performance, customization, and other factors that are important to mission critical businesses and government entities.

Source: 2020 Annual Report

Financials

Ondas sounds like a mature company and while it has been around awhile, it only recently got listed in 2020. 2020 Revenue grew almost 7x from 2019 to $2.1 million. The company is clearly in growth mode and it is far outspending its current operating income resulting in large losses.

Source: 2020 Annual Report

In addition, the balance sheet reveals the company has been unprofitable for some time as it has racked up a $65 million accumulated deficit.

Source: 2020 Annual Report

Ondas has $26 million left in cash after their IPO and after more capital raises they have $58 million in the most recent quarter.

Source: 2020 Annual Report

Revenue in the most recent quarter grew 58%, showing little sign of being affected by the pandemic's recent resurgence of late.

Ondas does not expect to be profitable anytime soon. Revenue is growing extremely quickly and the net loss continues to decrease, but the company has a very long way to go and needs to secure and execute on some large deployments to get where they want to go.

The company is pursuing its growth strategy by focusing primarily on railroads via its Siemens partnership and marketing its FullMax line of products as its flagship.

Currently, roughly half of their revenue is from just 2 customers, presumably two major railroads. The company has ample opportunity to find new opportunities and grow with existing customers.

Recent Developments

The next stage of their growth will be fueled by their partnership with Siemens AG to pair their IOT platform with Siemens Advanced Train Control System(ATCS). This combined package began being marketed in the second quarter of 2020 and the first were sold in Q1 2021.

In the latest quarter, the company acquired American Robotics. AR is a leading maker of drones and is one of the first with a license to fly drones beyond line of site by the FAA. The play here is that AR will utilize Ondas' technology to improve the drones communication with their controller, other drones, other IOT devices, and more. Ondas previously had drones as a target commercial market but as far as I can tell, did not have much penetration yet.

A big milestone for Ondas will come in Q4 2021 which is when they expect to receive a purchase order from their Class 1 railroad customers which will give us a much better idea of the magnitude and timing of future revenue. At present it is difficult to project and value Ondas given they are at pretty early stage in their growth cycle and it is not entirely clear how their FullMax products will be received by the market.

Conclusion

Ondas is a tough company to analyze. After their recent IPO they have 4-5 years of cash at the current burn rate, are ramping up their partnerships and should have 200-300% revenue growth in the years to come once things get rolling, but it's still hard to tell if it's a good value at current levels and worth the wait.

The current market cap is $360 million which is about 90x 2021 expected revenue. I think the right play here is to think about call options expiring in Q1 2022, which should hopefully spike on good news when Ondas' gets their large railroad purchase order. I don't think I recommend a non leveraged long position at this moment simply due to the long timeline until profitability and the inability to project a proper valuation.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.