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One of the most exciting SPAC mergers happening now is bringing Otonomo stock public.
We have talked a lot about SPACs on Money Morning, and I've gone through my strategy for picking my own investments in the space (read all about them here).
I always look at two things no matter what. I look at the management team and their past experience, and if there are any major holders that have strong past track records.
Higher–quality management tends to have access to a better network of private companies looking to go public. This was a big reason I was so interested in Reinvent Technology Partners (NYSE: RTP). That SPAC is co-lead by Mark Pincus, the founder and chair of Zynga Inc. (NASDAQ: ZNGA), and Reid Hoffman, cofounder of LinkedIn and Partner at venture firm Greylock. This along with many well-known board members led me to that stock.
While investing before a merger is one strategy, especially if you can invest in them near net asset value (NAV), I also have another strategy.
I wait until a merger is announced, read through the investor deck, and decide if there is mid–/long-term reason to buy into the company. While you can sometimes miss out on a big jump if there is a high-quality private company being taken public, you're still getting in early with tons of upside ahead.
This second strategy is what led me to Otonomo. The best part is the SPAC taking it public is still trading close to NAV.
Here's why this could be one of the most interesting SPAC mergers of 2021…
Otonomo Stock Is a Gold Mine for Connected Vehicles
Software Acquisitions Group Inc. II (NASDAQ: SAII) is the same team that brought CurioustyStream Inc. (NASDAQ: CURI) public. Now with its second SPAC it has announced intent to merge with Otonomo, an automotive data services platform.
While there has been a big focus on electric vehicles, charging companies, and autonomous technologies, I wanted to take a step back and think about what kind of companies can really benefit from all the changes happening in the automotive space.
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Data is like oil, and Otonomo is at the center of it all. As cars create more and more data, they collect that information and use it for predictive vehicle maintenance, fleet services, traffic management, and even insurance.
Connected vehicle data services is a new industry that brings huge opportunities to the automotive industry, and Otonomo's vehicle data cloud platform provides this by connecting directly to OEM databases. This allows it to integrate and analyze the connected vehicle data already collected and the 4.3 billion data points created every day. McKinsey believes this could be a $750 billion market by 2030.
This company is just getting started. 2020 was a standout year, even as people were off the roads and working from home. It more than doubled the number of vehicles on the platform to 40 million and now has 16 OEM agreements. This includes huge brands like Toyota, BMW, Ford, GM, and Kia. This market is continuing to grow, and 90% of new cars sold in 2020 in Europe and North America were connected cars. Dealing with this data in not in the OEM's DNA, and that is why it works with Otonomo.
Otonomo collects up to 150 parameters from a car, ranging from the windows to the engine to tires and the ADAS sensors. The data is becoming richer every day, making the platform even more valuable. Otonomo normalizes and cleans the data from all its different partners, manages the data security, and aggregates it to find optimal answers across the data.
On the data consumer side of the business, it has a multi-pronged approach. It not only sells into OEMs, but also works with rental companies like Avid Budget Group, consulting companies, insurance providers, and data providers like Blomberg and IHS market. It also has a self-serve platform that provides automotive data to emerging mobility companies.
While the focus has been on building the platform, it is now headed into the growth stage of the business. Right now, it projects its current base of approximately 40 million connected vehicles growing to 258 million by 2025. With the automotive base growing, Otonomo projects that revenue will grow from approximately $400,000 in 2020 to approximately $3 million in 2021 to $600 million by 2025.
That is 150,000% growth.
While the company is still losing money right now, it expects to have gross profit by 2022 as SaaS revenue becomes a larger part of its business. Post transaction as it de-SPACs, it will also have over $300 million in cash, which is expected to fully fund its business plan for the next five years.
Given the early stages of this business, there is a risk in execution, but I think given the partnerships Otonomo already has, along with its built-out platform, it's a great buy under $12.
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About the Author
Alex Kagin is the Director of Technology Investing Research at Money Map Press. He has spent the last decade working in equity research, most recently with Energy Capital Research Group (ECRG), where he led technology stock research along with working as part of a team developing a customizable financial data platform for securities analysis.
Prior to joining ECRG, Alex spent 8 years at DeMatteo Research, a boutique primary research firm and broker-dealer servicing the institutional investment community. He managed the Tech, Media, and Telecom vertical where he spent time connecting with hundreds of tech executives and hedge funds to get the pulse of the market.
Alex has a B.S. in Economics from American University and previously held Series 7 and 63 security licenses.