Description

KVHI is no stranger to the VIC, with relatively recent write-ups from March 2020 and August 2019. I encourage everyone to read these write-ups to understand their business lines, especially the transition their maritime connectivity business is coming out of. I am re-submitting it as an idea because I think it is a mis-priced option on the eventual adoption of self-driving vehicles. The company has been a poor performer and corporate governance cesspool, with Vintage Capital Management pushing for board changes in 2020 and Viex Capital Management losing a proxy fight in 2021. The activist pressure has led them to turn over their board with several new members over the last several years, and the lead director that Vintage placed on their board (Robert Tavares) recently resigned from their board. I believe the disappointing outcome in the various activist machinations over the last few years has resulted in shareholder churn and the company essentially being left for dead with a market cap of $161M and EV of only $134M.

What would be the right valuation for KVHI? This is difficult to say, but I would observe that the current valuation would be covered by their maritime connectivity business, which currently operates on an approximately $100M  recurring revenue run-rate. Revenue should grow from here, as the company is undergoing a transition away from its old VSAT connectivity business to a new high-throughput satellite (HTS) system which is now about half the business.

The option embedded in KVHI that I think is worth betting on is their inertial navigation segment. The company has long made fiber-optic gyros (FOGs) which let navigation systems estimate their positioning and momentum in the absence of GPS signals which are subject to jamming or malfunction. The company for many years has sold FOGs for military navigation systems, which require redundant navigation capabilities. The company has miniaturized this technology into what it calls a PIC or photonic integrated chip. The PIC enables FOG performance in a mass-producible semiconductor module and the company has successfully sold the technology to multiple developers of self-driving vehicles, notably Waymo. KVHI seems to have a near-monopoly on this piece of technology which arguably has to be included in all level 4 or 5 self-driving systems. While widespread self-driving seems to recede into the horizon as time goes on, I believe eventual adoption is inevitable. What will the leader in a key enabling technology for self-driving vehicles be worth? It is hard to say but given the valuation of all the public LIDAR companies (of which there are several) suggests something in the hundreds of millions or billions. KVHI itself estimates that PICs are a $2B market opportunity. If KVHI can maintain its technology leadership, the stock could be a multi-bagger over the next decade and would be an attractive acquisition candidate for a number of semiconductor or autonomous vehicle technology suppliers.

Catalyst

• Continued growth of AgilePlans
• Adoption of FOG inertial navigation modules in self-driving vehicles
• Corporate development activity in inertial navigation