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FRSX stock is valued too high compared to the company’s meager revenue and profit prospects
By Mark R. Hake, CFA Feb 4, 2021, 9:31 am EST
Foresight Autonomous Holdings (NASDAQ:FRSX) has, unfortunately, become another overvalued electric vehicle (EV) related stock. FRSX stock has shot up more than 600% as of Feb. 1. to $8.28 per ADR. In fact, this year alone it has spiked 100%.
The reason is this Israeli technology company is making software for stereo/quad-camera vision systems for the automotive industry. It has no revenue, no prospects of revenue, but interest from an Israeli defense firm and a Chinese firm.
The company likely believes it is on the way to commercialize its products, but there is no way to assess that right now. For example, there is no clear announcement of major contracts with any firm that will bring in substantial revenue for its autonomous vision systems.
To be more precise, there is no contract that would lead any thinking investor to pay $523 million, Foresight’s market capitalization, for the whole company. Foresight has had a string of losses, with no revenue, capping at negative $11.36 million for the nine months ending Sept. 30, 2020.
However, recently Foresight was able to raise about $26 million in a recent ADS sale to institutional investors. The capital raise was at a price of $4.15 on Dec. 28. Since then FRSX has doubled to $8.28 as of Feb. 1. The amounts to a speculative frenzy.
Even though Foresight is not exactly an EV company or an EV stock, it is clearly guilty by association. This is a good guilty that gives it the same kind of excessively high valuation that other EV stocks exhibit. The most likely candidate to use their technology on a huge scale is an electric vehicle company that does not presently have its own autonomous driving capability.
The problem is somebody might be buying that knows what is really going on with the company, or if they have a huge order or something like that. That is the only reasonable reason why FRSX stock could have risen so far so fast especially after doing the capital raise.
One Scenario That Might Explain Everything
Let’s say you are an automotive manufacturing company or even just a truck, van or fleet company. You see the handwriting on the wall – a need to be fully electric within the next decade. You might not have the wherewithal to do the research to produce an autonomous driving system. And you can’t offer an EV without an autonomous driving system since all your competitors will be doing this.
Therefore, you will either have to license a technology from a company like Foresight or frankly, you could just buy the company. After all, if your valuation is inflated because the market believes your firm is heading to EV status, you can afford to overpay for FRSX stock.
If you wanted to make sure no other firm could get hold of their technology you might be willing to make it a round number, such as $1 billion. After all, most of the purchase price would be in shares of your overvalued stock.
That’s me putting on my speculative, wishful thinking hat for a company – Foresight – that has lots of promise but no revenue. That is the only clear explanation I can give of what is going on with FRSX stock.
What to Do With FRSX Stock
I have seen this before. An R&D company finds it hard to break out of the R&D mode and become a commercial company that has to make a profit. I was once on the board of directors of a similar foreign company that had an ADR on Nasdaq.
Try as I might, I could not get the entrenched management to understand they can’t remain an R&D company. The temptation to constantly raise cash and grants, regardless of commercialization prospects, was very powerful. They were heavily reliant on their listed status to raise cash, just like Foresight.
Here is a typical example. Foresight signed a deal on Jan. 4, 2021, with a University of Michigan lab in Ann Arbor. There is no commercial aspect to this “collaboration.”
I am afraid that Foresight has fallen into this netherworld of being partly commercial and partly an R&D company. Management may have to be shaken up before they understand that its high-flying valuation now will not last. At least until there are clear prospects for the company to make revenue and profits.
Therefore, on the one hand, I suspect most investors should stay away from FRSX stock. But on the other hand, it seems highly likely that Foresight Autonomous will be an easy target. An acquisitive EV company – especially one that has weak or licensed autonomous technology – might be willing to overpay.
In fact, I suspect that is the main reason why FRSX has been spiking. Otherwise, its valuation right now makes no sense whatsoever.