Sunday, August 15, 2021

What is a fair valuation for iotex?

I have been invested in iotex since it came on Coinbase and have recently been learning more about crypto. My background is a PhD in life sciences from a top program and startup world vc experience in the bay area.

What I have been struggling with is how to properly value a particular coin from the perspective of how venture capital and the public markets value companies. Hopefully this post generates some discussion on what constitutes a fair valuation, outside of hype and the effect that Bitcoin has on pricing of the other coins. In other words, a coarse look at fundamentals and valuation of Iotex. Here goes my two cents:

Going onto Coinbase is essentially like doing an IPO for any coin. It has the exposure to newer retail investors and is publicly listed itself. An IPO being the ability for institutional public funds and retail to gain exposure to a company, I would argue that the closest thing to an IPO type of event of massive money flooding in is Coinbase.

Given this, it seems like post Coinbase/IPO valuation has gone from around 250 million to 1 billion. 10bil shares times 10 cents per share, plus or minus.

So let's just say Mr. Market values iotex as a company at 1 billion usd. In this post since I'm trying to use traditional terms on a cryptocurrency let's just treat iotex as a company, with a team, products, etc etc.

So, if the market says iotex inc. is worth 1 billion, what is this compared to a from the ground up valuation?

In my mind iotex can value for shareholders like you and me in 3 ways: 1. Royalties from hardware devices co developed 2. Royalties from software / transactions 3. Voting control over the fundamental infrastructure

  1. Royalties from hardware Iotex has one product on the market and one slated in production, pending chip shortage ending. Let's say all the devices sold are ucam, so call their devices 7000, price of ucam 60, current revenue stands at 420,000 usd.

So by a price to revenue valuation of 1.5 which is the median price to sales of the sp500 we have valuation of 420,000*1.5 = about 600k. Let's take this and say, okay maybe there's this crazy crypto valuation factor or we haven't seen quarterly sales numbers yet of 2x, that makes 1.2 million usd.

Lets say pebble can perform similarly and we want to price that in as well. Call it another 1.2 million usd.

Present valuation from hardware with these rosy valuation bumps still only puts iotex hardware valuation at 2.4 million usd.

  1. Royalties from software. To my knowledge, there is no pure software royalties or payments yet, otherwise they would have announced it. Something in this category would be: Google nest has an experimental device that it will pay .00001 iotex per device per transaction. Obviously numbers are fictional but the idea is that a major organization will be willing to pay a fixed amount for the distributed network infrastructure.

  2. Voting control. Presently no value.

So if we have a fundamentals based valuation of 2.4 million, and a market cap of 1 B, we have about a 400x valuation relative to calculated to priced. Which by any standards of investing is insane.

However consider, Tesla trades at 225x pe ratio. Is it insane? Yes, if you think Tesla is the best short selling opportunity this side of the moon. But short sellers have been getting burned constantly on Tesla.

This project however is not tesla because they have not shown an ability to scale. I mean, what is their business plan? Put out ucam. Then put out pebble. Then put out another product? This is a linearly scaling process, and you can't grow your valuation to meet market cap one hardware product at a time. Plus, are they even a hardware company? They are a Blockchain company, pure software. In my opinion this direction provides value only in the early days in demonstrating they can build a working product because no hardware manufacturer will build a product on their undeveloped platform. It is bootstrapping for them, building proofs of concepts. Not sustainable on the longer term because clearly smart devices will be built by Google or Amazon, or for industrial solutions by their own industrial equivalents.

So where does the revenue come from?

  1. Royalties from software. Currently they are on a consortium called iic with a subgroup composed of them and amazon and Huawei. Good, scalable partners. However a working group in a consortium in itself is suggestive at best, presently, which is why I can't assign valuation to it. Without tangible products or software projects that are a collaboration, they are just having some meetings and drafting PowerPoints about first principles.

But what about the future?

If they can partner with any company that already has significant existing products in any iot space, even a Chinese company big enough selling knockoffs, and establish a model of usage or royalty per usage, then that is the beginning of really scalable value creation.

The real opportunity in this space isn't even the smart devices we currently think about. It is the industrial infrastructure that will be the big moneymaker. Retail devices are something you and me can understand but think about any digital device in the electrical grid, all the businesses that run instruments, planes, buses, shipping etc etc. Anyhow if I were them that's where I would be trying to get adoption, on the software side in industrial devices, not building little knick knacks in hardware land.

So IF they can do this, all bets are off the table.

  1. Voting control. Say GE starts using this for thermostats or something. Now their infrastructure depends on this Blockchain. Then what? Then if you and I own iotx we have the voting power on the changes to the block. Iotx is fully tapped out at 10 billion and decentralized so the iotx people can't actually do anything about it without voting.

So ask yourself if you are GE, and to have a product that depends on this, what do you do? You buy this token that confers voting privilege as a hedge. You don't want infrastructure to be beholden to dumb dumbs like us.

MY SYNTHESIS

There is really no good way to value cryptos from a fundamental basis, and clearly trying to do so with iotx yields multiples that are insane. If Tesla is at 250x then iotx at about 2500 p/e is not so crazy if we can somehow price these intagibles in revenue streams 2 and 3.

However in my opinion iotx is not focusing on where they should be, namely industrial and skipping making their own products. No offense, but these guys are never going to beat Amazon at making echo devices or Google at making nest devices. Don't compete on the hardware or the system, demonstrate value or find those projects where they can understand value in the industrial supply chain and focus on adoption on the backend protocols. Just my two cents.

If the price is going to really go up it needs adoption in industrial sectors where the industrial end up owning iotx to get the rights to the chain.

CAVEATS

I am not a professional investor and have no special knowledge about Bitcoin or crypto. Only related experience is in large fund investing in public markets and vc fundraising and bio PhD. My opinions only, I am long eth and iotx.

Would love to see what you humanoids think!


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