By David Sterman
There is nothing more frustrating than finding a seemingly attractive young company, only to discover that its shares have already risen 800% in the past seven months. Then again, seeing that stock subsequently lose half its value in a matter of weeks suggests that perhaps you didn't miss out on "the next Microsoft" after all.
It has been that kind of roller-coaster ride for investors in Uni-Pixel (UNXL), which is either widely admired or widely reviled, depending on whom you ask. The company, which has yet to generate revenue from operations, will eventually make its investors a lot of money or prove to be a spectacular bust, depending on how the next three to six months play out.
The current question: With a 50% haircut, are shares worth your money?
This spring, Uni-Pixel saw its market value briefly move above $400 million -- yet that's only a fraction of the revenue potential that some saw (and still see) for this company. Uni-Pixel has developed an alternative touch-screen technology that aims to replace the current indium tin oxide [ITO] formulation that is found on many of today's smartphones and tablets.
ITO has some clear drawbacks, including:
- Cost: It is expensive to manufacture, especially in larger screen sizes.
- Raw material issues: Indium is a rare earth metal that is often produced as a byproduct of zinc mining. Concerns over China export restrictions of rare earth metals have led the industry to seek alternatives.
- Durability: ITO is brittle and breaks easily in the production process, leading to subpar manufacturing yields.
- High power consumption: This is due to ITO's electronic resistance of materials.
To address the shortcomings of ITO, Uni-Pixel has developed UniBoss, which is a very thin copper mesh layered on both sides of a thin plastic sheet. The copper mesh, which acts as a sensor, comes into contact with a computer chip (known as a touch controller) made by companies such as Texas Instruments (TXN).
According to Uni-Pixel, UniBoss is cheaper to make, consumes less energy than ITO (as copper is more conductive than indium), has fewer breakage issues in manufacturing, and can be made in high volumes on low-cost production equipment. UniBoss is expected to be sold for 20 to 25 cents per square inch, compared with 35 cents a square inch for ITO.
One of the key challenges of any technology upstart is to win the trust of potential clients. Uni-Pixel, which has yet to generate sales, has lined up impressive partnerships with firms like Texas Instruments (pairing UNXL's copper mesh screens with TI's touch controller). Yet chipmaker Atmel (ATML) looms as a tough rival. Atmel, which has dozens of existing customers, has been developing a technology platform that is similar to Uni-Pixel's.
Major tech firms might prefer to work with an established vendor with a history of successful product development and production expansion. Firms like Atmel have built up billion-dollar revenue bases on the trust they have generated over the years by rolling out new technologies.
Uni-Pixel's management claims to have developed superior production processes when compared with Atmel's, though that claim is hard to verify, especially as Atmel is fairly tight-lipped on the matter. (Atmel allegedly uses a traditional semiconductor approach, with thin-film deposition through photomasking.)
Although Uni-Pixel has three patents and several dozen patents pending, intellectual property in this niche is hard to protect, and potential rivals are likely working on current workarounds. Indeed, one U.K.-based company (and partner of Atmel's) claims Uni-Pixel has infringed upon its intellectual property. So while Uni-Pixel's supporters work up scenarios of huge revenue opportunities, they appear to assume that Uni-Pixel will capture a large share of this market. Management's repeated citation of a $32 billion potential market opportunity in 2018 is nothing short of reckless.
The Rise And Fall
This stock's huge surge and subsequent fall has tracked a series of events over the past seven months:
Dec. 7, 2012: A major PC manufacturer (unnamed but assumed to be Dell (DELL) is given an exclusive licensing agreement to be first-to-market with Uni-Pixel's UniBoss. The technology endorsement lights a fire under the stock. (Shares of Atmel received a similar lift that month as new contract details for its rival product were announced.)
January-March 2013: Shares soar yet higher as analysts see 2014 sales above $100 million (with forecasts well higher than in subsequent years). Williams Capital launches coverage on February 11 with a $30 price target that would eventually be boosted to $60. In early March, a large wave of insider selling takes place.
April 2013: Uni-Pixel secures manufacturing capacity -- a key investor concern -- announcing a partnership with Eastman Kodak (EKDKQ.PK) that will open up production lines by year's end. Shares move above $35. Soon thereafter, the company announces plans to sell new shares, in keeping with a long history of capital-raising in the absence of any earnings. Priced at $32 a share, the 1.2 million-share offering leads short sellers to collectively sigh with exasperation.
May-June 2013: Barron's publishes a negative column, which helps trigger an exodus from the stock in subsequent days and weeks.
Shares then started to fall at a quickening pace, tied to a series of concerns related to Atmel having a superior product, a possible entry by Apple (AAPL), and selling by key shareholders, but all of these reasons missed the mark. Instead, this stock has finally collapsed in the face of concerns that spread in late May that Uni-Pixel's technology may be only hype.
Is It For Real?
Through the rise and fall of this stock, it has become clear that this is a still-unproven technology with a management team that is prone to hyperbole. But that doesn't necessarily make this company a fraud (and resulting terminal short). It's hard to discount the fact that companies such as Eastman Kodak, Intel (INTC), which has invited the company to its technology developer conference, and an unidentified PC partner have presumably reviewed the company's technology and, to some extent, vetted it.
Yet that doesn't mean that a profitable revenue ramp is assured. The longer it takes for real sales to take root, the less investors should expect a bright future. After all, well-heeled rivals are pursuing this same technology, so time is not on Uni-Pixel's side.
Risks to Consider: Until Uni-Pixel generates meaningful sales growth and transitions into profitability, shares may see further dilution.
Wall Street analysts at lesser-known firms have been placing ever-higher price targets on this stock, which is likely stems from Uni-Pixel's several secondary share offerings -- not from conclusions drawn from independent research. Whenever you see that, you should beware.
This would seem to be an open-and-shut case of a stock heading to zero when the money runs out. Indeed, lawsuits are arriving at a furious pace. Yet even as there are several red flags around this company, it's undeniable that the touch-screen sensor market is fairly large, and it's also widely agreed that the current ITO technology standard is less than ideal. A solution that delivers higher sensitivity, consumes less power, and can be sold at a lower cost would be welcomed by makers of handsets and tablets.
Keep a close eye on this stock. This saga isn't over, and I remain curious to see whether Uni-Pixel is truly a game-changer. The odds are against tremendous success in light of a management team prone to hyperbole and broken promises, but it's too soon to conclude that this technology platform won't succeed.