This was an exciting week for us. For the past four years, my team and I have been watching Uni-Pixel, Inc. (UNXL) with keen interest. After discovering ZAGG ahead of the herd in early 2009, when we were publishing our newsletter The Inflection Point (TIP), we could not help but wonder whether ZAGG's days would eventually be numbered because of a touch technology that was being pioneered by a company called Uni-Pixel. Back then, Laura Guerrant of Guerrant & Associates was the IR rep for the firm. She pitched me the story and, while impressed with the potential for Uni-Pixel's technology, we chose not to buy the stock nor recommend it in TIP. Revenues seemed far off, with accelerated adoption clearly a few years away. Well, we got this one right, at least until last week when the company announced its first significant licensing agreement with a PC manufacturer. Uni-Pixel's time had finally arrived.
We have found that those stocks which base out the longest offer the highest potential for the most dynamic breakouts. UNXL is certainly no different. While management finally got "it right" in a massive way last week, a large and long-term holder of the stock, who happens to be a great new friend of mine, said that some investors were hoping for this licensing deal to occur a year ago. Because the company had been unable to deliver on its "proof-of-concept" until now, these investors had grown impatient and exited the stock. My friend, a very patient and experienced investor, instead bought more during the past year, landing him significant gains for him and his clients this past week, the types of weeks we all dream of as investors.
We took a position for clients on Monday morning, after reading Craig Hallum's very bullish upgrade report. We pyramided up at recent levels as UNXL has consolidated between $13.00 and $15.50. In a nutshell, Craig Hallum believes the recently announced licensing deal will now allow UNXL to scale operations in a significant manner and with terms that will not be dilutive to shareholders. It should also act as a spur for additional licensing deals from a few other companies who have also been vetting out UNXL's touch technology over the past few years. Because Uni-Pixel is only going to offer a few more of these types of deals, the analyst expects a relatively quick turnaround time for these other deals to go through.
The most impressive inflection points are often marked by companies seeing accelerated adoption take shape with their technology. We think such a moment has occurred with Uni-Pixel. At a time when the news is so negatively dominated with press about the fiscal cliff and the idiocy in Washington, isn't it refreshing to see new technology leaders of disruptive technologies begin to emerge? We certainly think so.
While the process has not been a seamless one, we are beginning to once again identify many other companies similar to Uni-Pixel, inflection point plays that are beginning to emerge at a quickening pace. Although it is something that we are not seeing every day, it is a process that has begun. This is exciting.
Of course, most investors are missing this. With confidence low and having been bitten by the market numerous times since the dot-com bubble, investors continue to flee equities and put their money into bonds. Isn't this a very bullish sign, from a contrarian point of view? We believe it is.
With the odds split over the fiscal cliff being resolved by the end of the year, the next few weeks remain clouded by Washington's indecisiveness and stupidity. We are therefore choosing to focus our energy on identifying the next set of companies that have the potential for moves like the ones we saw in Uni-Pixel this past week.
For those in doubt on how much higher Uni-Pixel's stock can go, remember that investors were very keen to give unproven Neonode, Inc. (NEON) a valuation of $231 million for a brief period earlier this year. Speaking of Neonode, IPI showcased the stock earlier this year as well. We were early here, as we sometimes are. All investors have weaknesses and being early is sometimes one of ours.
While on the subject, Neonode's shares are deservingly in the penalty box with institutional investors after the company massively missed its guidance. NEON's credibility will need to be rebuilt with both time and execution, not just new design wins. Having said that, we think NEON will also eventually be a big winner in the touch screen space. We just do not expect this to happen for a few quarters now.
On the other hand, odds seem high that investors will quickly see Uni-Pixel begin to scale both its top and bottom lines as early as Q1 of next year. While execution risk remains, UNXL's management now has the necessary capital to scale its operations. Craig Hallum sees $0.83 in earnings in 2013, on $28.2 million in revenues. In 2014, they see $1.46 in earnings on revenues of $54.5 million. With a $31.9 billion opportunity unfolding for them between now and 2018, this seems like just the beginning for the company. With the potential very real for the company to quickly scale to $100 million by 2015 and $200 million in 2016, UNXL's shares have the potential to be a multi-bagger from current levels.
Institutional investors have certainly noticed. Volume has recently swelled on the stock. With just shy of 10 million outstanding now and with 3 million more out there via both warrants and options, UNXL's share structure is extremely favorable. There is tremendous demand and not much supply. Take a look at a list of the institutional holders who were already long UNXL ahead of this licensing deal:
Click to enlarge image.
Source: Yahoo Finance.
Unlike Neonode, which has 33 million shares outstanding, UNXL's 9.8 million shares equate to a very limited supply available for newer institutional holders to establish positions in. They have been forced to pay up all week. Expect this trend to continue and to accelerate if the company can successfully land additional licensing deals in the near term.
In summary, while it is easy for investors to get discouraged by the lack of a follow-through for this market and by the histrionics and gridlock in Washington, we are hard at work vetting out companies with potentially disruptive technologies at important inflection points. We look forward to introducing investors to four such new names by year-end.
One final note for consideration: in periods of geopolitical risk, time-to-market for new technologies is often pushed back. This seems to be occurring with greater frequency. In time, however, for those with a longer-term and patient bent, stories like Uni-Pixel will emerge, offering investors the potential for profits like the one seen last week for UNXL's holders. Execution and recession risks will continue to be risks that investors should always be cognizant of when allocating their capital to such names. Liquidity risk is one final consideration investors should be aware of for many of these companies.
Disclosure: I am long UNXL.