Arbe Robotics: Buy The Rumor

In my second article on Arbe Robotics (NASDAQ:ARBE) (published Aug 25^th), I recommended buying it before the defining 12 months for this new company. Since then, the stock fell from $6.99 to a low of $3.11. In recent days, it has jumped to $6.22. I gave ARBE a target price of $100 per share, and I am sticking with that target.

Recent price action has been sudden and significant. The price change coincides with some information released from the SEC about Tesla (TSLA) and radar. It is just a rumor, but buying a rumor is often a good idea in my view.

In my two previous articles, I covered the ARBE product, its competitive situation, and the company's manufacturing plans.

In this article, I will look at its growing customer base and argue that Tesla is about to become an ARBE customer. If true, it might cause the ARBE share price to rocket higher. I will look at other tier-1 suppliers that appear to have committed to using ARBE radar; even if the Tesla rumor is just that and nothing more than a rumor, I think the other customers represent enough sales to deliver my $100 price target.

Tesla and Vision only

In October 2021, Elon Musk wrote :

Humans drive through the eyes that see, and a brain is made up of biological neural networks that analyze the information. There's no reason an autonomous vehicle would not work the same way.

This New York Times article clarified the Musk view of radar back in 2021. Musk believed the available Radar solutions were inferior to cameras, resulting in a loss of clarity and safety. The article suggests that many of his engineers did not agree with him.

In 2022 Tesla doubled down on the camera only approach,

Today, we are taking the next step in Tesla Vision by removing ultrasonic sensors (USS) from Model 3 and Model Y. We will continue this rollout with Model 3 and Model Y, globally, over the next few months, followed by Model S and Model X throughout 2023.

Tesla appeared to be continuing its camera-only approach and would remove all USS devices (ultrasonic sensors include Lidar and Radar). It is worth noting that when Musk first wrote about radar, he did say that he was specifically talking about the products available at that time, and if radar sensitivity could be improved, he might change his stance.

Tesla and Radar

In this FCC filing, Tesla applied for long-term confidentiality regarding the certification of a new RF component; that request was granted (the first document on the link explains the reasoning)

To avoid any unnecessary disclosure and competitive harm before our product launching, we would like to request above exhibits to be held for another 60 days until 2023-02-07.

All related documents were held in confidence. Test report part 1 describes the product as a non-pulsed Automotive Radar operating in the 76-77GHz spectrum and supporting 3 sensing modes. The final document is a request to have the period of confidentiality extended into 2023. Other documents cover the general specification of the radar device (it is radar on a chip) and some of its testing. The radar device has now been added to the Tesla parts catalog.

The key takeaway here is

1. Tesla has likely changed its stance and is testing an Automotive RADAR.
2. The product spec matches the ARBE product.
3. The new product is due for release in 2023 and has already been added to the parts catalog.

All of the documents available by following the link were held as confidential at Tesla's request, and they only became available on a date after the 7th of February. I believe they were made available on February 15th. The recent price jump on ARBE shares coincides with that timing, suggesting that many people could've concluded that Tesla will announce a hardware upgrade to its cars based on the ARBE 4D radar on a chip.

If this rumor is true, it is a game changer for ARBE, the highest profile largest volume EV manufacturer; changing tack to integrate ARBE sensing products would be an undeniable verification of the quality and accuracy of ARBE radar. Where Tesla leads, a host of other companies might follow.

Sales and guests at the earnings call

In 2022 ARBE announced its first production order (340,000 chipsets for Q3 2023) from its long-term partner HiRain, the Chinese tier-1 OEM.

During the Q3 2022 earnings call, the Arbe management team was accompanied by high-ranking officers of several prominent and influential tier-1 OEM manufacturers, an unusual step.

Chriss Van Dan Elzen (head of Radar Products at Veoneer) was on the call. Chriss spoke in length about using radar in cars stating that cars will have three or more radars each as a base case. He said that Veoneer had multiple inquiries worldwide in many automotive industry segments. He also noted that Veoneer had looked at this space for over five years and researched numerous companies and approaches before choosing Arbe as its partner. Chriss added that Veoneer produced 50 million radars annually and will target 200 million by 2029. The Veoneer agreement was a new one not previously discussed and was the subject of analyst questions at the end of the call. Veoneer has over 6,000 employees and reported $1.7 billion in revenue in 2021. Its customer base is almost a who's who of the largest automotive companies.

Valeo (OTCPK:VLEEY), the world's leading tier 1 ADAS manufacturer, has also selected the Arbe chipset to add to its market-leading LIDAR offering. A Valeo representative was at the earnings call and discussed Valeo's 17 billion euro turnover and their ambition to capture 15% of the global car radar market by 2030 using the Arbe chipset combined with their existing offerings. The recently announced partnership with BMW may indicate the use case for ARBE radar.

Weifu Group is a Chinese tier-1 OEM. They focus on mass market production and target various automotive uses. The president of Weifu attended the Arbe earnings call and once again discussed the plans for imaging radar. He stated that 40% of new vehicles would be equipped with radar. This deal may tie in with the Tesla rumor. The radar device is described as manufactured in China in the FCC filings.

Financial Performance

Q3 2022 report: Revenue increased to $1.3 million (up 100% YoY), and economies of scale increased gross margin from 30% to 73%.

Total expenses increased from $8.5 million to $11.8 million. The net loss fell from $13 million to $10 million.

ARBE reported $63 million in cash and zero debt at the end of the quarter. ARBE probably has 18 months of cash runway with current sales.

All the current sales are samples and testing items; as soon as a commercial order begins, finances will change significantly. We need to see some data from these commercial sales to understand how profitable ARBE will be; not until then can I build a mathematical model and use it to make a prediction.

Price Target

In the recent earnings call, ARBE did reduce its guidance slightly, mainly by pushing back some dates, and that has caused wall street analysts following ARBE to reduce their revenue forecasts. The reduced revenue forecast does not, in my mind, seem reasonable. Pushing out dates at this stage when they are delivering test units should not affect the longer-term sales volume. ARBE has consistently forecast $300 million in sales per annum. The analyst reduction also probably does not consider the Tesla income I am suggesting may happen.

In my previous article, I shared the fair valuation calculation from Simplywall.st of $118 per share (simplywall.st use a 2-stage DCF based on analyst revenue forecasts).

I also shared the cash flow forecast from my model, which I used to calculate a slightly lower fair value of $100

Simplywall.st has lowered its fair value calculation to $77, reflecting the reduced revenue forecast from Wall street analysts, a reduction in margin, and an increase in the discounting factor.

I am not changing my target as the announced change to delivery dates does not affect the long-term cash generation I have forecast. The impact of any sales revenue from Tesla will more than offset any negative impact of the reduced guidance. ARBE has not changed its margin guidance, and I see no reason to change my WACC discounting factor.

Conclusion

The ARBE story continued to unfold with positive news and increased customer engagement. The cash position remains strong, and the Tesla rumor led to a jump in the share price. The Tesla 2023 investor day is scheduled for March 1st, which may be the day of a radar announcement. I have exited my position in Nikola (NKLA) and used the money to buy more of ARBE

The rumor may be true it may not, but the customers on the earnings call are committed, and I believe they represent enough business to reach my $100 target.

I continue to recommend buying ARBE.

Note:

I added to my ARBE position again in January at $3.72, giving me an average entry price of $5.97. I also added ARBE to my 2023 demonstration account and will share the progress of that trade in comments along with some technical analysis.