This technology company is forecasted to grow its earnings at an annual rate of 30% over the next five years.
KVH Industries, Inc. (KVHI)
From Technology & Opportunity
KVH Industries, Inc. (KVHI) operates in two main segments, each with a different focus. The bulk of the company’s revenue comes from its maritime internet connectivity business. That’s pretty much exactly what it sounds like: internet for boats and ships.
Recently, KVH transitioned from a hardware sales model to a service-based internet model. This has resulted in a successful turnaround of the company’s outlook through a consistent stream of low-margin revenue. Wall Street is bullish on the company’s ability to pivot in this particular segment.
That being said, maritime isn’t really why we’re interested in KVH. The real growth story for us is in the company’s fiber-optic gyroscopes (FOGs), a kind of inertial measurement unit (IMU). FOGs are highly accurate electronic components that measure the orientation and movement of various pieces of hardware and machinery. Your smartphone, for instance, has a gyroscope so it knows which way you’re holding it. This is how it knows whether to orient a video or photo vertically or horizontally.
An FOG has the same function as the gyroscope in your phone. But it uses fiber optics for a more accurate reading. This makes FOGs ideal for machinery applications that are more robust, such as industrial robotics, drones, and automated vehicles.
Chances are that you’ve heard of lidar before. If you haven’t, know it’s essentially laser-powered radar that’s capable of mapping the surroundings of a driverless vehicle. Virtually all driverless vehicles today use lidar. The undisputed leader in lidar is a company by the name of Velodyne LiDAR. Unfortunately for investors, the company remains private.
But that doesn’t mean there isn’t an opportunity to ride that technology for profits. You see, lidar is useless without a gyroscope to orient it. For instance, if a driverless car is on unlevel ground, the lidar system needs to know. Otherwise, it would be feeding a tilted version of the world to the driverless car’s software.
That’s why most driverless cars on the road today have KVH’s technology inside them. KVH has produced hundreds of thousands of gyros, both as standalone systems and as part of its own high-performance IMUs and navigation systems. These systems play a vital role in a range of applications. This includes robotics, mapping and surveying, and a host of other emerging unmanned and autonomous technologies.
Simply put, KVH makes the best FOGs in the business. This is shown by its market share and the use of its products in highly advanced projects, such as the Defense Advanced Research Projects Agency’s (DARPA’s) advanced robotics program. KVH’s sensors have already found their way into some unique areas of tech, aside from their use in the humanoid robots of Boston Dynamics. Other industry leaders that look to KVH for its FOGs include Lockheed Martin, General Dynamics, iRobot, and BAE Systems, to name a few. Although FOGs make up a small part of KVH’s top line, our thesis is that this segment will overtake its maritime business down the line. So far, this is turning out to be the case.
During its most recently reported quarter, KVH saw strong shipments of its FOG systems. CEO Martin Kits van Heyningen reported on a recent analysts’ call: “Fiber optic gyro sales rose over 50% year-over-year, this was our 7th consecutive quarter of double-digit growth in this market. We’re continuing our efforts to expand our capacity to match the high demand and we’ve recently fully staffed the second shift at our facility in Illinois. This jump in demand is a result of customer requirements for high performance and lower cost in applications like Airborne autonomous platforms, imagine stabilization, mobile mapping and the general move towards autonomous everything. Our system’s easy integration, compact design and outstanding accuracy, performance and reliability make them an ideal choice for these applications.”
And maybe more importantly, we’ve seen a recent shift in sentiment from Heyningen about the company’s strategy to implement FOGs in the automotive market. Rewind a few years, and he was cautious to make any statements about feasibility. But that has officially changed with the completed development of a new FOG that’s been built specifically for the automotive markets. Mind you, this chip is currently shipping out to many unnamed automakers and tech companies testing driverless vehicles.
Another quote that investors might find particularly compelling is this: “Most of the self-driving cars on the road today have some of our technology in it.”
Now, you’d think the market would be all over KVH. But the fact is that the company is too small to be covered by major institutions. These developments are happening under the radar, as we speak.
KVH expects to have a partnership settled by mid-2019. But as of now, that’ll be difficult to predict with confidence. In any event, KVH has strong leverage moving forward because its technology is almost essential for driverless applications.
KVH Industries, Inc. is a “Buy” under $12. The risk level is “Medium.”
Jason Stutman, Technology & Opportunity, www.angelpub.com, 877-303-4529, November 2018