Many of today’s investors, one sage noted, seem to be picking up pennies in front of a steamroller.
Specifically, UniPixel Inc (NASDAQ:UNXL) is gunning its engine and we think that big machine is just about to flatten unfortunate investors – again.
The Woodlands, Texas company makes touchscreen film for electronic devices and a hard coat protective film for various uses. The stock just recently emerged from a two-year-long drop from about $40 to the recent ~$6.70.
(Source: Yahoo Finance)
The initial run-up two years ago escalated on news of a UniPixel-Kodak partnership announcement that April, targeting year-end 2013 to begin reeling out rolls of film to make touchscreens respond to touch. This seemed to validate the technology. Never mind that Kodak and Kingsbury Corp. released a very similar announcement two months later about their partnership that, apparently unlike the UniPixel deal, has landed a sale. And no one knew then that the UniPixel-Kodak roll-out would hit multiple delays and not happen until … well, everyone’s still waiting two years later. Regardless, the stock lingered in the $30-$40 range.
Later in 2013, the stock began cratering amid a pile of reports suggesting problems including excessive promotions, misallocation of capital, repeated delays, heavy competition, disappointing technology, questionable insiders (see a bull’s interesting response here), along with class-action lawsuits, including one later dismissed and others settled.
And it was all capped off by the Securities and Exchange Commission issuing subpoenas on Nov. 19, 2013 in connection with some UniPixel sensor agreements, hurtling the stock down to around $12 and gradually trailing downward.
But recently, the market has forgotten about UniPixel’s problems and its zero revenue in each quarter of 2014 and its missed earnings. Indeed, investors sent the stock rocketing to about $6 on hopes the company may be able this quarter to begin commercial production of a hard-coat resin and a sensor product.
TheStreetSweeper has not yet received a response to requests to UniPixil for an interview.
Check out other viewpoints here and we’ll lay out the top reasons we think it’s time to drop the pennies and run like crazy.
Dangerous, shifting market
Even low-cost companies in Taiwan have found the touchscreen market can range from brutal to deadly.
The market has battered both of Taiwan’s biggest and second-biggest touchscreen companies.
Wintek Corp., the second-largest touchscreen manufacturer, had the world on a string just three years ago, according to a number of articles. Revenue had quadrupled from 2009 to $3.5 billion in 2012, driven primarily by juicy Apple contracts for iPhone 4 and iPad touchscreens.
But Wintek poured $630 million into expanding capacity to address an anticipated market for larger touchscreens for non-Apple devices – a market that failed to live up to expectations.
Yet another blow occurred when Wintek lost 75 percent of its Apple orders because Wintek couldn’t provide the needed technology for the iPhone 5.
Meanwhile, Wintek and others watched Chinese competitors enter the market, worsening the oversupply of touchscreens and increasing market concerns about the industry.
Focus Taiwan wrote in October: “Wintek’s financial woes are making many investors nervous that other touch panel suppliers will encounter similar financial difficulties under the current unfavorable circumstances.”
Wintek fired 14,000 employees, shuttered three plants and filed for bankruptcy protection in October 2014.
More small competitors, lower margins hurt
Such incidents are common within the industry, experts say.
“It mostly has to do with the growing competition and lower margins,” Jerry Chen of Laibao High Tech told iphoneincanada. “Before, there used to be two to three companies sharing a single order and now there may be as many as 10.”
Taiwan’s largest touchscreen maker, TPK Holdings, has the benefit of yield and scale as the market leader. Yet it has watched its margins fall from about 22 percent in 2009 to just 8 percent gross margin in 2014, even as its working capital becomes even more negative … dropping last year to minus $665 million US dollars and operating income sliced to 1 percent of the year before.
Indeed, TPK, has suffered a stock decline of about 65 percent since 2013.
UniPixel itself notes the falling price risk in this market, as shown in this snapshot from its corporate presentation:
(Source: Corporate presentation)
UniPixel’s model is inherently less efficient
While touchscreen giants face troubles, too, at least they had an advantage over UniPixel from the get-go.
Those companies’ labor costs are much lower because they have based production in Taiwan or mainland China, close to panel makers.
But consider the case of Atmel Corp. Like UniPixel, Atmel set up its touchscreen product plant in the United States.
Atmel launched production of its XSense line in Colorado Springs amid great hopes late in 2013.
In February 2015, just 15 months later, it decided to shut down the plant. Apparently, its metal mesh sensors for 10.1-inch HP tablets were not cost competitive, according to one expert.
Atmel’s chief financial officer said during the recent quarterly earnings call that his company “recently completed a strategic review and decided to exit this business.”
No really viable product markets to chase
UniPixel went after a 7-inch tablet opportunity, failed to get an order and then proceeded to chase the customer’s 10-inch table opportunity, according CEO Jeff Hawthorne’s response to questions following his Jan. 14, 2015 presentation at the Needham conference. The referenced comments are in the last couple of minutes of the webcast here.
“At the time that we decided to develop the 7-inch, there was a pretty reasonable market for it. What’s happened since is that the 7-inch market has really been going into oversupply, so our customer asked us to focus on 10-inch instead of 7-inch,” said Mr. Hawthorne.
But the tablet market has been losing share to smartphones. Retailers have tried to push discounted tablets for months and months, locally, offering tablets as cheap as $49.99 in stores and online. When we checked in stores, shoppers milled around the counters displaying smartphones, particularly large-display or phablets, but showed little interest in tablet displays.
Worldwide statistics verify that preference.
Global tablet shipments are on the way down and have already dropped 30 percent this quarter, according to Digitimes Research.
Smartphone market opportunities will evade UniPixel
When Henry Ford created his daring and dastardly horseless carriage, the buggy whip makers must have been shaking in their boots. Consumers climbed into Ford’s machines and, no matter how beautifully polished the horse-drawn carriages, no matter how exquisitely groomed and shod the horses, new technology sent even the best of buggy whips to the wood pile.
Likewise, we’ve seen the recently reversed fortunes of touchscreen makers Wintek and TPK.
Like UniPixel, those companies’ business plans revolved around transparent rolls of film that were laminated on top of touchscreens. Using a touch sensor from the vendor, plus an LCD from another vendor, the manufacturer would put the two layers of film together.
Recent iPhone screens are different. Apple eliminated the double thickness of film to make the phones thinner. Now, rather than encased inside a touch sensor, the sensing element goes inside the liquid crystal display or “cell.” The technology is called in-cell.
The Galaxy S screens use similar technology. But the on-cell approach involves multiple layers: top and bottom glasses, electrodes, liquid crystal display or LCD layer and a color filter. Like in-cell, it’s all part of the panel assembly.
Though embedded sensors were initially only for smartphones, they have now reached the 10-inch size, according to Seeking Alpha author RichardXRoe, who goes by a pseudonym and is short the stock.
“And they (embedded sensors) are effectively free – or very close to free,” he told TheStreetSweeper. “They are embedded in the display by the display manufacturer with only one or two extra steps.”
So, manufacturers have discovered they can cut costs using in-cell or on-cell, as they bypass UniPixel and other sensor vendors.
“That’s a dramatic shift in technology that hurts their business,” an analyst told TheStreetSweeper.
Suddenly, like the buggy-whip maker of yesteryear, the sensor maker – no matter how good, no matter how competitively priced – gets sent to the wood shed.
And a smartphone opportunity isn’t even a topic of discussion for UniPixel, according to Mr. Hawthorne’s comments during his Needham conference presentation. (Listen to the webcast here)
“We are addressing tablets, notebooks, 2-in-ones and all-in ones,” said Mr. Hawthorne. “We are not addressing the cell phone market.”
Unprofitable UniPixel looks overvalued compared to profitable peers
|Company||EV/Sales (’16)||Est. 2015 Rev.||Est. 2016 Rev.|
|UniPixel||1.17 x||$10.95 m||$52.75 m|
|TPK||0.58 x||$ 4.89 b||$ 5.44 b|
|O-film Tech||0.94 x||$ 4.19 b||$ 5.21 b|
Established touch sensor companies TPK and Shenzhen O-film Tech trade at low enterprise value-to-sales multiples, as indicated in the chart above. They are both profitable and have significant scale.
But look at UniPixel. Lacking both profit and scale, the company is currently valued as if full-scale production in 2016 were a certainty. Those Wall Street expectations look ripe for revision. UniPixel sales are expected to go from zero in 2014 to $11 million in 2015, then take a nearly 5-fold leap to $53 million in 2016, then $105 million in 2017.
So the valuation and consensus forecast for UniPixel seem completely out-of-synch.
Meanwhile, O-film, unfortunately for UniPixel, is making quite a name for itself, as indicated by this snippet from material comparing sensor suppliers and various alternatives to indium tin oxide such as UniPixel’s arena – metal mesh. This is from a tutorial presented by Intel Corp. senior touch technologist Geoff Walker: O-film is the “800-pound gorilla” of metal mesh!
Bulls assert that quality issues and delays are expected to be resolved, leading to some commercial rollout in coming months, including the Kodak deal that is two years behind the target date. They presume UniPixel film is cheaper and better than indium tin oxide, so it will find uses.
Though recognizing that scaling issues may raise their ugly heads, bulls believe the hard-coat protective film and sensor product will produce meaningful revenue and some sales will begin in 2015. Though the CEO recently said he thinks there’s enough cash for capital expenditures in 2015, some bulls admit that, if UniPixel does finally produce a commercial product, it may need an equity raise.
In fact, company filings state:
“…our long-term viability is dependent upon our ability to successfully operate our business, develop our manufacturing process, sign licensing, development and distribution agreements, develop our products and raise additional capital through offerings of our debt or equity securities to meet our business objectives.”
If only UniPixel’s products and opportunities could be half as exciting as the piles of teeth-gnashing and cheerleading articles written about the company.
But, unfortunately, while UniPixel was trying to pull itself together, a once-welcoming market was growing rough and tumble, piling up injured competitors who’d been furiously scraping up slim margins and even slimmer operating income. And if UniPixel gets past production issues plus that SEC investigation and actually begins commercialization, it will still have undifferentiated, non-price-competitive products, we believe. In fact, we agree with analysts who say it will likely need a potentially dilutive equity raise to even achieve commercialization.
It looks like UniPixel and its investors are about to get steamrolled. Don’t be surprised if the stock craters to someplace around $3.35 per share.
* Important Disclosure: The owners of TheStreetSweeper hold a short position in UNXL and stand to profit on any future declines in the stock price.