According to Engadget and a litany of websites, Sony (SNE) recently demonstrated its slick new 13.3-inch Slate, at the Educational IT Solutions Expo in Japan. This A4-sized tablet (i.e. digital "yellow / legal pad" replacement), uses a flexible plastic-based reflective display from E-Ink (8069.TWO), called Mobius, and is designed specifically for power-sipping (3-week charge) note-taking.
As the media on Sony's new product convey, this super-thin product uses optical touch technology and has no cover-glass. This intuitively means the Sony slate's touch technology has to be licensed from Neonode (NEON). Neonode's involvement makes perfect sense considering that Sony was NEON's first optical-touch licensee (for eReaders in 2010) and has been a very strong customer. Finally, if one looks at the resolution specifications for Neonode's MultiSensing technology, its fast 1 Kilohertz (1,000 times per second) refresh rate makes it ideal for handwriting, versus capacitive's inadequate rates of 60-120 times per second (handwriting requires >300hz refresh rates).
The slate's articles and interviews seem to indicate this product will be in the market this year. Considering target demographics (i.e. students), I imagine we could see this launched as early as "Back to School" season (September).
Sony's sharp and magnificently-designed product, seems like a no-brainer for active handwritten note-takers like students, doctors, attorneys, etc., and could be the sizzling "need to have" product that reinvigorates the anemic reflective display markets (like eReaders) ... provided that pricing is reasonable. Although I already own a laptop and an iPad, I know that this is something I just need to have, when tablet typing/writing just won't do.
Considering that global e-education markets are still embryonic, with incumbent publishers extremely-reluctant to lie-down for Apple (AAPL), I would think this content-agnostic platform, with an easy-on-the-eyes reflective display (tablet e-learning opponents complain that transmissive displays, such as color LCDs, are onerous for intense reading), dazzling A4 form-factor, and non-distracting device (critics also insist that iPads and Android tablets are too distracting for K-12 education) might have a solid chance of gaining traction among K-12 educators. Moreover, with reflective displays entering the color realm in the next year from the likes of privately-held Japan Display, the possibilities and prospects for this new Sony form-factor could surprise to the upside.
Financial and Market Analysis
From a numbers perspective, according to Futuresource Consulting tablet-based K-12 education in the United States grew 29% YoY in 15.6M units in 2012, and will quadruple over the next 5 years. Futuresource also estimates the U.S. market accounts for 25% of the global K-12 tablet market, which implies that the global market is 60M+ (and growing).
Thus, from a financial perspective, I believe it is reasonable that Sony's slate could easily garner ~5% market share in 2014, due to its groundbreaking industrial design, brand incumbency in Sony's forward-thinking region, and unique focus on tablet education, medical, and legal markets. A mere 5% market share in 2014, would expand Neonode's eReader revenue base to $8M in 2014 ($0.20 per share), up from $5M in 2012 excluding Amazon (AMZN).
2014 Setting Up Well
Looking at Neonode's increasingly diversified growth prospects for 2014, I get a reasonable revenues estimate of $55M.
- eReaders - With the addition of a Sony slate, I believe Neonode should be able to generate eReader revenues of $8M, excluding Amazon.
- Autos - NEON has locked up at least 3 of the top ten system OEMs, and has design wins with many more. Thus, I believe $10M of revenues in 2014 is more than reasonable.
- Printers - In light of Neonode 12+ wins at two Tier One OEMs (the printer/copier market is ~100M units per annum), I believe $15M of revenues is more than likely.
- Laptop PCs - Although NEON has not YET announced wins in PC, a reference platform with a Tier One Semiconductor OEM, which would either be Intel (INTC), or more likely NVIDIA (NVDA), should yield at least 5%+ share of an 180+ million laptop market in 2014 (was 194M in 2012). Assuming an ASP of at least $1.50, I believe $13M of revenues is certainly possible.
- Handsets - NEON has a few wins with a Tier One OEM, and a license with a domestic Chinese OEM. These should equate to at least $5M of revenue in 2014, with room for considerable upside.
- Children's Tablets - In addition to the anemic MEEP, Neonode has wins with Top Tier OEMs in this space. This segment should yield at least $4M in revenues during 2014.
- Other (includes GPS, Toys, and Proximity Sensing Cases) - Lets assume zero revenues for now, but I have to believe these embryonic high-volume segments have significant potential beyond 2014.
Stock Likely Undervalued
If Neonode were to generate $55M of revenues in 2014, on an OPEX base of $20M (included NRE costs), this would result in pretax income of $35M. With taxes rates not likely more than 15%, NEON's net income could easily eclipse $30M, which would equate to Pro Forma EPS of $0.75.
With long term and diversified secular growth prospects, I believe NEON should garner a PE of at least 20x (the licensing sector is trading at 23.5x Pro-Forma 2014 EPS), which would equate to a target price of $15 per share (exclusing the value of NEON's disruptive IP).