CloudMinds – A Smart Chinese Robot Stock?
They say that you should be able to convey your business model to a nine-year-old because that means you truly understand what it is you do. For example, here at Nanalyze, our business model is to babysit a bunch of MBAs who produce insightful articles on technology investing which all our lovely readers consume for free. How do we make money when we offer our product for free? That’s a good question little Johnny, now run along and go play with your toys.
One company we’ve written about before is a Chinese firm called CloudMinds which raised $316 million in funding from some notable investors including Softbank and Foxconn Group. In our article, we commented that “details about its cloud robotics platform are still skimpy.” If we had to explain what they do to little Johnny, we’d say that “CloudMinds is a Chinese company that builds software that can control many robots.” Fast forward to today and CloudMinds has now filed for an IPO which means they’ve filed a document (for foreign companies it’s called an F-1, for U.S. companies it’s called an S-1) which contains loads of additional information. In other words, we should be able to read their IPO filing and figure out what exactly the company does.
What Would Ya Say, Ya Do Here?
“Operating smart robots for people,” is what the company says their mission is. They describe their product as an end-to-end cloud robot system, which consists of a “cloud brain,” a “nerve network,” robot controllers and robot bodies.
In order to better understand what that means, let’s look at the three categories the company uses to break down their revenues.
- Cloud Robot and Services – We offer a range of robot products that are embedded with corresponding end-to-end cloud AI operating systems and processing services, including cloud robots such as Cloud Pepper and inspection devices such as smart optic detectors and cloud Raman sensor.
- Cloud AI Solutions – We sell a range of smart devices that are embedded with corresponding end-to-end cloud AI operating systems and processing solutions. Such devices have primarily been used in smart city projects.
- Smart Devices – Revenues from smart devices consist of revenues from sales of smart communication devices such as robot controllers and smartphones. As we continue to invest in, and expand our product and service offerings of cloud robot and services, expect smart devices to, in the long term, contribute to a decreasing portion of our revenues.
We’ve highlighted in red text certain portions of these descriptions. The first bullet point talks about “robot products,” the second bullet point refers to a “range of smart devices” for “smart city projects,” while the third bullet point again refers to “smart devices” which they imply will be discontinued over time. Later on in the document, the company states the following:
Six of our customers accounted for approximately 26%, 18%, 16%, 15%, 11% and 11%, respectively, of our total revenues in 2018.
Since they provide the names of these six customers, maybe we can use those names to better understand what’s going on here.
For the first four customers, CloudMinds states that they will sell them “smart devices” and then “provide the customer with cloud-based AI services and other cloud services for two years after the delivery of the goods.” We’re not sure why there’s that mention of a two-year limit, but the first three names we looked at went nowhere.
- Guangzhou Jiesidu Energy Co. (28% of revenues)
- Guangzhou Junyuelai International Trade Co. (18% of revenues)
- Jingxie Technology Development (15% of revenues)
We were surprised to find nothing about these companies using cursory Google searches, save for SEC filings relating to this IPO. We really don’t know what to make of this, given these three names are supposed to account for 61% of CloudMinds’ revenues.
The fourth company on the list, Hebei Yuandong Telecommunication System Engineering Co. (11% of revenues), fared better as they appear to have a website according to the below description taken from Bloomberg:
Some searches around that company name along with CloudMinds produced nothing so another dead end.
The fifth company on the list, Red.com (16% of revenues), is an American manufacturing company that produces digital cinema cameras. According to Crunchbase, “it offers HD video cameras, digital still and motion cameras, and lenses as well as accessories such as modules, displays, media products, power batteries, cables, and rail components.” According to the filing, CloudMinds will “design, manufacture and supply CloudMinds holographic display smartphones for RED to sell in the global market.” This sort of technology is something we touched on in our article on What’s up with Holograms and Hologram Projectors?
Our last company, Beijing Zhixin Micro-electronics Technology Co, appears to be a manufacturer of bare printed circuit boards that was established in 2013 and now has over 1,000 employees. CloudMinds plans to sell them “smart optic detectors.”
Now that we’ve looked at the six customers that CloudMinds is working with at the time of their filing, we’re interested in looking at some revenue numbers. According to CloudMinds, revenues climbed more than 500% between 2017 and 2018.
Analyzing a company’s financials can be complicated and exhausting but we like to keep things simple so that even little Johnny can understand. CloudMinds sold around $19 million worth of products and services in 2017. That number soared 500% in 2018 to $120.7 million. That sort of growth is staggering, but so are the losses that come with it.
In 2018, the company burned through $156.7 million in cash which means that they’re incurring significant losses. The $500 million that CloudMinds plans to raise as a result of their IPO will be used to fund these losses until the company can achieve profitability. If the money runs out, they need to raise more money which dilutes existing shareholders. Pretty simple stuff. We can also see that in the last quarter ending March 31, 2019, the company’s revenues fell sharply when compared to the previous year. The company explains this as follows:
Our revenues from cloud AI solutions decreased from US$32.0 million for the three months ended March 31, 2018 to US$6.7 million for the three months ended March 31, 2019, all of which was attributable to the decrease in revenues due to the delivery timing of purchases related to smart city projects.
Ideally, this variability in revenues can be smoothed out using an “as a service” business model because it’s not looked upon favorably by investors.
We all know that Softbank just throws money at startups, but they’re sophisticated enough to vet any startup such that they can understand the business model. In this case, we still don’t understand what exactly CloudMinds does because we don’t see a cohesive story throughout the F-1 filing and we can’t understand why there’s no information to be found about half of their major customers. It’s all rather confusing, and we’re going to punt on this one citing the words of famed investor Warren Buffet who once said, “Invest in what you know.” Now that’s an investment strategy that even little Johnny can understand.
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