2023-08-01 18:55:33 ET
Summary
- WISeKey is building future-proof semiconductors and IoT solutions, focusing on enhancing security measures for interconnected devices in the Internet of Things (IoT).
- The company has successfully launched picosatellites that can authenticate non-fungible tokens (NFTs) from space, demonstrating the potential of connecting satellites to IoT devices.
- WISeKey operates through four subsidiaries, each specializing in different tech segments, including semiconductors, cybersecurity, and NFT marketplaces.
Thesis
With the rise of AI, blockchain technology, and embedded systems, everyday objects and devices have become increasingly interconnected. This interconnectedness, known as the Internet of Things (IoT), calls for enhanced security measures to ensure data integrity.
WISeKey, a technology company focused on cybersecurity and IoT solutions, is actively exploring new tech frontiers and creating industry-first solutions aimed at securing the key components of the Fourth Industrial Revolution (4IR).
Introduction
WISeKey International Holding AG (NASDAQ: WKEY ) is a company focused on providing security and Internet connectivity solutions. WISeKey leverages cutting-edge applications of satellite, semiconductor, blockchain, and AI technologies to create secure cybersecurity and IoT solutions. The company creates robust security solutions that address the challenges posed by interconnected devices and data sharing in today's connected world.
WISeKey has successfully launched several picosatellites, called WISeSat, following the launch of its first IoT picosatellite - WISeSat-1 and WISeSat-2 - via the SpaceX Transporter 3 Rideshare Mission in January 2022. The satellites have demonstrated the ability to generate NFTs (non-fungible tokens) from space, showing the potential of directly connecting satellites to IoT devices for NFT authentication. The use case for WISeKey's satellites and spectrum of technologies cuts across several industries, including automobile, agriculture, healthcare, AI, and telecommunications; for example, a smart agriculture solution that uses WISeKey's picosatellites has been developed and is capable of managing farms and monitoring the state of farm fields and plants.
WISeKey Company Structure
WISeKey operates a holding company structure with four subsidiaries. Each WISeKey operational subsidiary focuses on a specific tech segment, all working cohesively to secure the Internet and connected devices. The holding company is headed by the founder and CEO Carlos Creus Moreira, a cybersecurity veteran who served as a United Nations Expert on Cybersecurity and Trust Models for nearly two decades.
SEALSQ Corps
WISeKey's subsidiary, SEALSQ Corp. (NASDAQ: LAES ), specializes in developing and selling semiconductors, post-quantum cryptography solutions, and managed public key infrastructure (PKI) for IoT. Among WISeKey's subsidiaries, SEALSQ is the first to mature and achieve a listing of its ordinary shares on Nasdaq.
SEALSQ Revenue, FY2020 - FY2022 (Seeking Alpha)
SEALSQ's revenue increased by $6.2 million for FY2022, a 36% YoY increase. While gross profit saw an average growth rate of 11.5% between 2020 and 2022. SEALSQ is off to a promising start for FY2023 as WISeKey's latest report shows a non-audited Q1 total revenue of $7.2 million for SEALSQ - a 91% YoY increase. The report attributes this revenue growth to higher semiconductor and hardware security modules demand from WISeKey's existing customers in the Network IT infrastructure and Home Automation sectors.
It is estimated that in the coming years, quantum computers will have the capability to break the cryptography algorithms in use today, including RSA and 3DES. These cryptography algorithms play a vital role in protecting personal, professional, and financial information, and the potential of quantum computers to breach these encryption methods poses a significant threat. SEALSQ is developing future-proof and quantum-ready semiconductors to defend against quantum attacks if and when quantum computers become mainstream.
WISeKey SA
WISeKey SA focuses on providing advanced cybersecurity solutions for IoT, blockchain, and AI, along with secure authentication and identification services for users and devices interacting with these technologies. Its flagship product, the WISeID platform, delivers secure authentication and identification services to prominent clients , including the Government of Seychelles.
WISe.ART Corp
WISe.ART Corp owns and operates a multi-chain NFT marketplace supporting Ethereum ( ETH-USD ), Polygon ( MATIC-USD ), and CasperLabs blockchains. To ensure authenticity, WISe.ART adds an identification layer to NFTs traded on its platform. WISe.ART aims to be a trusted blockchain platform that will command a significant share of the assets tokenization markets and the listing and trade of high-value goods represented as NFTs.
WISeSat AG
Intending to become a backbone for IoT connectivity, WISeSat AG focuses on deploying low-cost satellites that provide IoT connectivity, using a SaaS (software as a service) model. This low-cost, secure satellite-based connectivity, known as IoT connectivity-as-a-service, enables businesses and enterprises to securely interface with and leverage space technology without the intricacies of space technology management.
Growth and Revenue Generation Strategies
WISeKey and its subsidiaries have a vast array of innovative products and services, positioning the company for sustained growth and a consistent revenue stream.
WISeSat's connectivity-as-a-service solution aims to bring the same automation, scalability, and flexibility that the SaaS model has helped businesses achieve over the years. Just as SaaS providers generate revenue by a usage-based pricing model, WISeSat has the potential for consistent retention and expansion revenue generation from the lease of satellites and terrestrial infrastructure to companies.
WISeKey has initiated a Public Private Partnership that enables countries to locally produce and customize SEALSQ's microchips, reducing their reliance on and importation of foreign semiconductors. This comes at a time when cyber attacks have become rampant, and safeguarding data and intelligence has become a top priority for most governments. I view SEALSQ's strategy of laying the groundwork for governments to build their customized, proprietary microchips as a viable approach to gaining market penetration for SEALSQ semiconductors.
By establishing their own semiconductor personalization centers, countries can take control of their supply chains and ensure the security and reliability of their critical technologies.
- Carlos Moreira, WISeKey CEO
Semiconductor manufacturers in East Asia currently dominate the global semiconductor market because semiconductor manufacturing is mainly outsourced to companies in the region. 60% of semiconductors and 90% of advanced semiconductors are manufactured in Taiwan. Taiwan Semiconductor Manufacturing Co (NYSE: TSM ) dominates the semiconductor market by a wide margin ( estimates say 54%), raking in $75.1 billion in revenue ( TTM ) and $46.6 billion in cash from operations ( TTM ). WISeKey's astute semiconductor localization strategy, if skillfully executed, has the potential to substantially bolster the company's market share in the semiconductor and IoT sectors.
WISeKey has strategically forged partnerships in the North American region during the initial months of 2023. The company entered a partnership with Rep One, a US-based sales representative organization, and another partnership with Impact Technical Sales LLC, a sales representative, and design services organization.
Another potential revenue stream is its NFT platform. As WISe.ART's marketplace morphs into a full-fledged NFT marketplace, fees and commissions generated from the listing and trade of NFTs will create a consistent revenue stream. The NFT market is expected to experience a compound annual growth rate of 35.02% between 2023 and 2027, reports reveal. WISe.ART also offers a white-label version of its NFT marketplace to clients, like luxury brands, that would like to create their branded NFT platforms. WISeKey charges a one-off purchase fee, then additional fees for the set-up, installation, and ongoing maintenance of the white-label product.
Financials
WISeKey's total revenue for FY2022 increased by ~35% compared to FY2021; this is impressive top-line growth. Data from WISeKey's consolidated balance sheet gives a quick ratio of 1.36 and a current ratio of 1.76. WISeKey's quick ratio is higher than the semiconductor industry average quick ratio ( TTM ) of 0.98 (based on csimarket data). In my view, this gives WISeKey a relatively favorable liquidity position to meet immediate financial obligations.
WISeKey's current ratio of 1.76 falls below the industry's average current ratio ( TTM ) of 2.23. But I don't see this as a call for concern yet, as I believe a working capital ratio of 1.76 still portrays a reasonable buffer of current assets to comfortably handle short-term obligations. The fall in the working capital ratio could be due to a high inventory value. A significant increase in inventory, without a proportional increase in other current assets, can lead to a lower working capital ratio. The balance sheet shows that WISeKey currently holds $7.5 million in inventory - its highest inventory value in more than five years. WISeKey's increase in inventory could be due to factors like the expansion of manufacturing capacity and anticipation of higher semiconductor and IoT product demand. As WISeKey aims to produce its semiconductors locally, it is logical that the company would stock up on raw materials (which are part of inventory) for smooth production.
WISeKey Net Income (Seeking Alpha)
WISeKey's income statement reports negative net income from 2020 to 2022, following a net income of $8.2 million in FY 2019. The latest net income ( TTM ) is a deficit of -$27.5 million. Consecutive negative net income over the three fiscal years (FY2020 - FY2022) raises concerns about WISeKey's ability to generate sufficient revenue to cover its expenses.
The cash flow statement shows positive cash from financing ( TTM ) at a value of $4.2 million and negative cash from operations ( TTM ) at a value of -$17.1 million. This means WISeKey's core business operations have consumed more cash than generated, but the company has had some success raising funds from other sources.
WISeKey's stock WKEY is listed on Nasdaq and currently trades at ~$4 per share. WKEY shares outstanding is 3.39 million. Given that WISeKey reported a negative net income for the most recent fiscal year (FY2022), the traditional Price to Earnings (P/E) ratio may not be suitable for the company's stock valuation. As a result, I will instead utilize the Price to Sales (P/S) ratio to assess the company's valuation. The P/S ratio considers the market capitalization relative to total revenue and can provide valuable insights into WISeKey's performance and valuation, even in the absence of positive earnings.
WISeKey Market Cap (YCharts)
WISeKey's total revenue ( TTM ) is $23.8 million while its current market cap (based on YCharts data) is $34.9 million. This gives a P/S ratio of ~1.5. This simply means that investors are willing to pay around 1.5 times WISeKey's total revenue for each dollar of revenue generated. Based on csimarket data, the current average P/S ( TTM ) ratio for the semiconductor industry is ~3. Therefore, WISeKey's P/S ratio is about half the value of the industry average P/S ratio. This potentially indicates that WISeKey's stock is undervalued relative to its revenue generation. WISeKey's ~1.5 P/S ratio implies that investors are paying less for each dollar of revenue generated by WISeKey compared to the average valuation of companies in the semiconductor industry.
FY2022 Quarterly Cash Burn and Resulting Cash Runway
Let's delve into an essential aspect of WISeKey's financial health - the company's cash burn and its resulting cash runway. I would make use of WISeKey's FY2022 cash flow statement (because WISeKey files only the annual 20-F form with the SEC), summing up the values for cash flow from operating activities, cash flow from financing activities, and cash flow from investing activities in each quarter to determine the quarterly cash burn.
In the quarter ending March 31st FY2022, WISeKey's cash burn was -$5.8 million. I got this figure by summing up the cash flow from operating (-$5.8 million), financing ($200,000), and investing (-$200,000) for the quarter. Using the same formula and data from the cash flow statement, Q2's cash burn was -$5.8 million, Q3 burned -$1 million, and another -$1 million cash was burned in Q4. This results in an average quarterly burn rate of -$3.4 million.
Based on WISeKey's last reported cash and equivalent value ($20.7 million), found in its FY2022 balance sheet, WISeKey's resulting cash runway (cash and cash equivalent / average quarterly cash burn) is 18.26 months or ~1.5 years. With a cash runway of ~18 months, WISeKey seems to have sufficient liquidity to cover its operating expenses for the near future. In my view, a ~1.5 years cash runway allows WISeKey to focus on its long-term growth and expansion plans, allowing the company to invest in research and development, marketing, and strategic partnerships without the immediate pressure of raising capital. An ~18 months runway also gives WISeKey ample time to generate positive cash flow from its operations or to secure additional funding, on favorable terms, if needed. That being said, it is important to note that the cash runway is a dynamic metric, and actual circumstances may change over time.
WISeKey's management has earlier expressed confidence in growth projections for FY2023, citing a backlog of orders worth $36 million and a growth in demand for IoT semiconductor products. This optimism is in line with industry projections, with some market researchers estimating the semiconductor industry to grow at a 12.2% CAGR, increasing from $574.44 billion in 2022 to $1.38 trillion in 2029; while the global IoT connectivity market, currently valued at $282 billion, could grow at a CAGR of 20.6% between 2023 and 2028, reaching $720 billion.
Risk
WISeKey faces a range of operational risks as a company, along with some investment risks that prospective investors must take note of. These risks are important factors for stakeholders to consider before making informed investment decisions in the company.
Income and Cash Generation
WISeKey's negative net income for the past three fiscal years (FY2020 - FY2022) raises concerns about the company's ability to generate sufficient revenue to cover its expenses and achieve profitability in the future. The cash flow statement's negative cash flow from operations ( TTM ) shows that WISeKey's core business operations have consumed more cash than generated. The resulting cash runway of ~18 months provides some stability; however, continued negative cash flow could impact the company's ability to sustain its operations in the long term.
Market Competition
WISeKey operates in markets that are continuously evolving with rapidly changing technologies and customer demands while facing competition from industry peers with deep pockets, substantial budgets, and high CaPex. Its semiconductor subsidiary SEALSQ faces competition from well-established companies, like Taiwan Semiconductor Manufacturing, that have an extensive supply chain network and boast big clients like NVIDIA (NASDAQ: NVDA ), Qualcomm (NASDAQ: QCOM ), and Apple (NASDAQ: OTC:APPL ). TSM is currently building a semiconductor fab in Arizona, which is expected to be operational by 2024. I consider this development a significant competitive and strategic challenge for WISeKey as it seeks to establish its semiconductor foothold in the North American market.
Stock Valuation
WISeKey 30-Day Average Daily Volume (YCharts)
Assessing WISeKey's true stock valuation is challenging due to its negative net income. Currently, WKEY trades at a 30-day average daily volume of ~57300 shares; this low volume poses the challenge of adequate liquidity and difficulty for investors to exit trade positions quickly. As a small-cap stock, investors should be cautious about the risks associated with trading WKEY, and mitigate those risks by applying trade strategies like dollar-cost averaging and limit order execution.
Takeaway
While net profit is negative, WISeKey's healthy top-line growth and its YoY increase in revenue make it a company not to totally write off. The company's latest unaudited report shows a $15.1 million revenue for H1 2023 - a 39% YoY increase.
WKEY is worth holding in the portfolio of investors with a high-risk tolerance and a very long-term portfolio strategy while giving WISeKey's management the benefit of the doubt to make prudent investment decisions aimed at the company's long-term growth.
While its current ratio may be slightly below the industry average, WISeKey's liquidity position remains reasonably sound, ensuring it can handle its short-term obligations.
In conclusion, WISeKey presents an intriguing investment opportunity for investors with a high-risk appetite and a strategic focus on long-term growth. Despite reporting negative net income for the past three fiscal years, the company's top-line growth has been impressive, reflecting its dedication to pioneering cutting-edge solutions in the cybersecurity and IoT sectors. WISeKey's innovative initiatives have the potential to disrupt and secure various industries, from agriculture to healthcare. As always, investors must conduct their due diligence and carefully evaluate their risk tolerance before making any investment decisions.
For further details see:
WISeKey: A Forward-Looking Company