2021 Strategy Series: Cerence - CRNC
Vested with an initial price at US$53.50.
This is the 2nd company that I am writing under this series. Currently my average price is at around S$45+ and it is the biggest position I have in my portfolio.
I do believe, despite its current market share of about $5bn and the significant price gain, the company is still relatively unknown and few has written about this company.
Thus, I do hope this will provide my readers with an understanding of my opinion about this big unknown company.
Part 1 – What the Company Does?
Taken directly from their website, "Cerence is the world’s leading provider of automotive assistants, creating intelligent, flexible and intuitive in-car experiences for the world’s leading automakers. With deep integration with the car itself and the flexibility to bring drivers’ expansive digital life into the car, we stand in a league of our own."
In human language, it is a WHITE LABEL company that is behind the voice recognition/command system in the car such as Mercedes, Audi, BMW, Nio, Xpeng, Toyota and many more.
Part 2: The Segment of Fundamental Scorecard That Caught My Eyes
Fundamental Scorecard is a visualization tool that simplify all quantitative information into graphs while calculating the intrinsic value using timeless theories, and providing conclusions about the company for the reader to have an easier time to make decision. (If you are interested, do click on this link).
On an overall basis, the company may not look good, but what caught my eye is the increasing revenue along with a loss - This made me want to understand more. After all, what really attracted me to this company is the qualitative aspects of its business.
Part 3: My Qualitative Research with USCCR
Similar to Fundamental Scorecard, USCCR is my own simple way of doing Qualitative Research. Qualitative research is important because it Builds Conviction of a company you are intending to buy or is holding, even if the whole world is against you. It will Reduces the chances for you to make Rash Decisions that you may regret later.
|The USCCR Model|
To explain further on some of the positives:
1) The business goes in this way: Professional Fees > License > Connected Services.
Do note that Professional Fees has almost zero gross profit. It is a service where Cerence work with the OEM engineers to incorporate their AI voice commend system into the OEM system.
Then for License, it is almost 100% gross profit and is charge only once per vehicle sold.
After which, it is Connected Services where updates for the car maps or new/additional voice command apps are being charged for and this is where it is expected to be recurring.
2) Autonomous driving will eventually requires a PA system: This is solely my opinion, but once there is autonomous driving, it make sense that there is a new for a 2 way communication between the car and driver. Just like the Ironman suit where Javis is the AI.
3) Owler's website only listed a few competitor. But nevertheless, we cannot ignore big tech.
Cerence is generally in a great space right now with great potential growth. In addition, Cerence provides a white label product/services for the OEM - this does not take the shine away from the OEM.
On the other hand, it does reduces the recognition from the public eye. Everyone will think these systems are from the OEM directly.
This created an issue because OEM can always choose a competitor and cut the relationship from Cerence. It is important to note that OEM has the most say on which systems they will like to use for each model. For example, if Audi has a relationship with Cerence, it does not mean all the cars in Audi will be using Cerence product. It may only be a particular model.
We must also not forget the Big Tech that is trying to gain market share in this space.
Nevertheless, Cerence has probably recognized these threats. For their latest product, Cerence Drive 2.0, it also targets 2-wheeler and Building Mobility services such as Lifts. These will expand their TAM and allow them to grow further.
Furthermore, for Cerence, we must not look at the numbers in its balance sheet but more on backlog which they release every 6 months. In 2020's 10k, it stated "The revenue we actually recognize is subject to several factors, including the number and timing of vehicles our customers ship, potential terminations or changes in scope of customer contracts, and currency fluctuations. As of September 30, 2020, we estimate our total backlog to be $1.81 billion, including $387.5 million of fixed backlog and $1.42 billion of variable backlog."
Although no time period was stated here, but in 2019's 10K, it stated that $1.36bn is expected to be recognised over the next 3 years. Therefore, we can pretty make up the expected revenue in 2021, 2022 and 2023.
Finally, I like to use a sentence in their 10K to showcase their strength - "Our solutions have been installed in more than 325 million automobiles to date, including over 38 million new vehicles in fiscal 2020 alone. Based on royalty reports provided by our customers and third-party reports of total vehicle production worldwide, we estimate that approximately 53% of all shipped cars during the fiscal year ended September 30, 2020 included Cerence technologies. Cerence hybrid solutions shipped on approximately 7.4 million vehicles during the fiscal year ended September 30, 2020. In aggregate, over 65 automobile brands worldwide use our solutions, covering over 70 languages and dialects, including English, German, Spanish, French, Mandarin, Cantonese and Shanghainese"
With that, I do feel pretty confident in Cerence despite the significant share price increased. My personal target price is around $160 to $180 per share, which means there is still some room to grow. I will also continue to add to this position if there is any pullback in Cerence's share price.
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