Smart Eye Stock: The Business of Tracking Eye Movements
You see with your brain, not with your eyes. The images captured by your eyeballs are actually upside down, and your brain flips the images right side up. A fellow named George Stratton studied this phenomenon when he wore glasses that inverted his vision. After about seven days, his brain adjusted, and he started to see everything properly. Then he took the glasses off, and things got really weird. What he discovered is that we not only see upside down, but also backwards – pretty much what happens when you drop a few too many tabs of Purple Jesus.
Your eyes only move smoothly when tracking a moving object, else they jump about in rapid movements known as staccatos. Being able to track these eye movements helps us understand how humans pay attention, learn, react, and show emotion. Eye tracking has evolved into its own niche industry, and one Swedish company capitalizing on that with a focus on automotive applications is Smart Eye (SEYE.ST).
About Smart Eye Stock
Founded in 1999, Sweden’s own Smart Eye is a $440 million publicly traded company that started out with Saab Automobile as their first customer, and the automotive industry has been a key target group ever since. Of the company’s three business segments – Automotive Solutions, Research Instruments, and Applied AI Systems – automotive makes up the majority of revenues – about 63% in 2021. While revenues have been slowly growing over time, they’ve yet to become meaningful ($10 million per year or more) with 2020 revenues coming in at just under $8 million.
The focus on automotive requires investors to believe in a pot of gold at the end of the rainbow. Smart Eye’s technology is being used in driver monitoring systems (DMSs) that the company expects will be standard issue in new cars soon.
Driver Monitoring Systems (DMS) have been developed to improve road safety. With eye tracking software, these systems can detect whether a driver is inattentive, drowsy, or actually asleep. The system can then generate impulses to alert the driver’s attention, and if this fails, take control and stop the vehicle.Credit: Smart Eye
It all starts with a “design win” of which Smart Eye has reported dozens. By early-2020, Smart Eye had secured design wins to deliver eye-tracking technology for 84 car models in the premium and mid-class segments with six European and six Asian car manufacturers. One to three years after securing a design win, cars go into production, at which time Smart Eye expects to see a license fee of $5.87 to $11.74 per car (5 to 10 euros). License fees from a specific car model are determined partly by the number of produced units, and partly by the number of vehicles equipped with non-standard functionality. As of their latest annual report, Smart Eye expects to see $250 million in revenues from existing design wins.
While the company can’t provide much insight into which auto manufacturers they’re winning contracts with, we’re told that Smart Eye’s eye-tracking technology has been installed in the BMW X3, X4, X5, Z4, 3 series, and 8 series. (The company claims to be the leader in the premium auto segment when it comes to eye tracking.) It’s the promise of future revenues that helps explain why shares in Smart Eye are so overvalued according to our simple valuation ratio (anything over 40 we consider to be too rich):
- Market cap / annualized revenues
440 / 8.134 = 54
Over time, the number of shares outstanding has also been increasing sharply as the company sells shares to fund their operations. The dilutive effects of such raises often go unnoticed by investors who only focus on share price.
Smart Eye came across our radar recently when they acquired a company called Affectiva to create what they’re calling “a transatlantic AI juggernaut.”
Smart Eye and Affectiva
The last time we came across computer vision startup Affectiva was back in 2016 when we talked about how they could analyze in real-time any of the 10,000 possible facial expressions you could be displaying at any given time. Since then, the company took in $62.6 million in total disclosed funding before being acquired by Smart Eye for $73.5 million. An initial glance at the Affectiva website today shows a founder engaged in some healthy “I’m a Middle Eastern divorced mother of two fighting to survive in a male dominated world” self-promotion along with a company that’s pivoted towards using emotion detection in vehicles – in-cabin sensing – for a variety of use cases.
In addition to their focus on automotive, Affectiva has found success in media analytics for more than a decade, with their technology being used by 28% of the Fortune Global 500 and 70% of the world’s largest advertisers.
It’s exciting to see Smart Eye expanding into new functional and geographical domains with their acquisition of Affectiva, but there’s a much bigger question that needs to be answered. Just how big is the opportunity for eye tracking across all possible applications? It turns out the thesis is lacking the sort of blue ocean total addressable market (TAM) we like to see.
About the Eye Tracking Thesis
With the eyes being the second most complex organ next to the brain, it’s no surprise that an entire domain of technology surrounds how to interpret human vision. When we first wrote about The World Leader in Eye Tracking Technology, the thesis sounded quite compelling. The revenue growth was there along with numerous industry verticals that could capitalize on the ability to track people’s gaze. From our last article on Tobii Stock and Tobii Dynavox Stock, we can describe four broad use cases that make up the eye-tracking opportunity:
- Assistive technology and research
- VR / AR / Gaming
- Smartphones / computers
Let’s say both these companies merged into one following the Tobii split and the combined market cap exceeded our $1 billion threshold. Would we purchase the stock? We’re not sure we would because the growth areas don’t add up to a sufficiently large TAM based on what we know today. Let’s evaluate each one.
Assistive Technology and Research
We applaud the use of eye-tracking technology to empower disabled people, but it isn’t a thesis with lots of growth potential. It’s precisely why this division will soon be spun out of Tobii and trade as its own stock. If eventually, we end up with ubiquitous eye tracking on all computing devices, then there’s nothing really special on offer here anyway. The same holds true for using eye-tracking technology to perform laboratory research. Both these segments just don’t have the large blue ocean total addressable markets we’ve come to expect from disruptive technologies.
AR / VR / Gaming
Sure, there’s now eye-tracking support for a handful of expensive virtual reality (VR) headsets, but just how many of these will be sold? For VR, we can understand the foveated rendering value proposition, but what about augmented reality (AR)? Perhaps your AR glasses might someday impose information over objects you look at as your gaze moves. Again, how many AR headsets are being sold these days? So far, the promise of Google Glass and Magic leap has proven to be just that, a promise.
Eye Tracking for Computers and Smartphones
Enabling computers and smartphones with eye tracking is said to be a “very large” opportunity, but again, we’d like to see at least some traction in this space that proves eye tracking provides enough usefulness on common computing devices and smartphones to merit implementation. Even if eye tracking is the way forward for every electronics device we use, who is to say that it can’t be accomplished using some basic machine learning algorithms with standard hardware? (More on this in a bit.)
We recently wrote about how Smart Eye’s competitor Tobii is pivoting into automotive which means there’s clearly room enough for more than one winner. The sudden demand and interest in driver management systems can be partially attributed to the growth of autonomous driving. Monitoring drivers can be particularly useful for assisted autonomous driving systems. When mankind reaches full autonomy, does this use case disappear entirely? It’s something investors need to consider when looking at Smart Eye a decade in the future, along with how ubiquitous eye tracking might become without the need for sophisticated technology solutions. Today, researchers are accomplishing sufficient eye-tracking capabilities with little more than some machine learning algorithms and a bog-standard selfie camera.
Hardware vs. Software
A piece published last Fall in Nature titled “Accelerating eye movement research via accurate and affordable smartphone eye tracking” looks at how machine learning algorithms can be used to track eye movements effectively. When compared to Tobii’s hardware, they’re not quite as good, but perhaps not all use cases demand the sort of accuracy that professional hardware offers.
This is where all the intellectual property that Tobii and Smart Eye have amassed comes into play. But how big an opportunity are they battling it out for?
We pay little heed to analyst forecasts from research firms which try and predict the size of any particular technology niche. That’s because these estimates are usually all over the place. In the case of eye tracking, all analysts seem to agree on one thing – in the next 5-7 years, this niche won’t amount to much more than several billion dollars in TAM. Sure, that means that a company like Tobii and/or Smart Eye might have a lot of upside, but at this point, the growth story is long on speculation and short on traction.
Once Tobii splits up their company into two publicly traded stocks, they’ll be more directly competing with Smart Eye. These two Swedish companies of a similar size could team up and really put this space on lockdown, especially given the small TAM they’re both targeting. If that happens, we’ll definitely be keen to take another look at the eye-tracking thesis.
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