Savvy Trades and Investments

[southacresdave]

Wade...DAIO

What % of their revenue from automotive sector? From the Q4 2016 cc call, CFO stated "Automotive bookings were up 55% year-over-year and now represent 47% of our orders." I've heard them say something similar more recently (cc call or investor presentation?!?). I doubt it has changed much. I think 50% is a reasonable number.

As for your second question.....obviously the future is a bit of a crap shoot, but I think the likelihood of DAIO continuing to grow is good.

Think of DAIO being more dependent on "# of semiconductors/car" x "realization by industry for the need for security at the chip/microcontroller level as the the electronics of vehicles grows" x # of cars sold worldwide as the real factor for them. The typical midrange car right now has approx $350 worth of semiconductors in it. On the other hand, the higher end cars have over $1000 worth. The more this trend flows down to the vehicle price food chain, the more the prevalence is needed for security at all levels.

DAIO "Our strong growth in market share in automotive electronics reinforce our belief that we're in the wave of a new and exciting electronic content, including automotive infotainment and instrument cluster applications, advanced driver assist systems, increased use of electric hybrid engines and powertrains, and generally more systems to support autonomous driving strategies from leading automotive OEMs".

The biggest thing that will change the industry is autonomous vehicles. Just Google it and you will see every single major company is pushing to be the first to get to level 4 (i.e. can drive in a city or the highway). Right now Baidu in China is close to being the leader with them saying they will be there by 2019 with the idea that taxis in their major cities can be set up for it. Once the computer controls the car for a moment, then you need security at all levels of a car right down to the windshield wipers, radar, lights, etc. Also you have something that is called Drive By Wire. It's the idea that the are no more cables in a car (i.e. throttle cable). Everything is run by wires, small microcontrollers, servos, etc.

https://www.lifewire.com/what-is-drive-by-wire-534825

Also, once a car is able to drive by itself at some level, then the need for infotainment goes up for the passenger. That's pretty obvious.

The current projections put 10% of all new vehicles sold by 2022 to be able to drive at level 4 autonomous. The idea is that 90% sold by 2030 will be there. Even the U.S. Congress---which can't agree on anything---is actually passing legislation to advance autonomous vehicles and push security:

https://www.nytimes.com/2017/07/21/technology/self-driving-cars-washington-congress.html?mcubz=1

You can also figure the trucking industry will go this route for highway driving at least.

Imo, the advancement of the electronics in the automotive industry is only going one direction. The only question is the rate at which it moves and flows down to most levels of vehicles. It's why I say if business is good for DAIO today, it will be even better in 5 years.

The next area then is Internet of Things. It's why the company is spending so much R&D money on their Sentrix program and lining up the major partners they can now.

last cc call......"the increase in our R&D was about $600,000 year-over-year and that was predominantly to support the management secured programming. There were some other automotive initiatives in there as well, but most of that goes to MSP. And again, those investments are going to capture what we consider to be a very meaningful opportunity. I haven't quantified it specifically for you in dollar terms, but I used the term meaningful deliberately."

Nothing the company is saying or the actions they are doing indicate that they think the shift towards the need for security at the microchip and microcontroller level is peaking right now. I'm betting that this is true. If so, then the company has a real shot at earning $1+/share in 2018. I know you have done very well on AAOI in the last year. Have you asked yourself why are Google, Amazon, FB, plus a host of other companies building these massive data centers (and driving AAOI's revenue)? It isn't just to sell more books/retail or to let businesses run their Excel spreadsheets in the Cloud more, it's also because data accumulation and analysis is going to be a huge money maker in the future. The connection of vehicles and the connection of IoT are two big things that are part of this. He who controls the software of autonomous vehicles controls the data! It's why this area won't fail. Too many companies desperately want a piece of this. DAIO is just a backdoor investment approach to this desire to get info on everything. The more things are connected, the more that they will be hacked going forward. As such, the need for security increases.

As I said before, imo, technology is only going one direction. Vehicles will use more semiconductors as cars advance. Iot usage will increase. The only questions are at what rate? And can DAIO get itself lined up with the right partners and be cutting edge on what they provide (vs their competition) so they are integral to it all at the security demand at the semiconductor level?

One added plus to this all---30% of DAIO's revenue in Q2 was reoccurring (adapters sold to connect to the microchips + continual software updates). That will only grow in revenue as more and more systems are used.

As for Q3. I'd be ecstatic if Q3 bookings came in at Q2 levels. I'd be happy if they did what SSKILLZ estimated of 20 cents/share in Q3 and 16 cents/share in Q4. I will take 62 cents/share diluted for the year for a company who's future looks like it is in strong demand. I can hold for 2018 and 2019 and let it keep building more and more. The day the first vehicle is autonomous (level 4 at least), is the day you know Wall Street will go crazy and chase up everything that is connected to it. DAIO is a backdoor microcap approach to it all. The plus is IoT is another huge potential winner for DAIO and isn't priced into the stock at all.