Uni-Pixel.... this stock continues to surprise people every day. Both longs and shorts. So much so, that it is often difficult to see through all the chaotic noise, the rampant pumping, and the incredible amount of FUD (Fear, Uncertainty, and Doubt) spread by all sides involved. But I will try to do my best to lay out a clear picture of what is going on with this company and the outlook for its future.
I first wrote about Uni-Pixel (UNXL) back on New Years Eve when I claimed that it was possibly the best investment for 2013 (here). This was not only my first article on the company, but also my first Seeking Alpha article, and therefore wasn't quite perfect. I wrote another article two months later in early March that helped clarify some details and also provided a slightly more accurate portrait around the potential of this tiny company. It can be read here. For those unfamiliar with the story of this company, I highly recommend reading one or both of these articles. For those who simply need a reminder, Uni-Pixel is a micro-cap company (current market cap of $166M according to Yahoo Finance) in the development stages of creating a new type of touch sensor based on copper metal mesh technology to compete with the incumbent ITO touch sensors. The claims are that Uni-Pixel's sensors, called InTouch (previously called UniBoss) are cheaper, sturdier, flexible, have faster response speeds, and are particularly better/cheaper for larger screens. Given the current trend of tablets, touch laptops, touch all-in-ones and more, this seems like a promising industry.
Clearly, with the stock now sitting around $13.85, my predictions have seemingly been wrong, and I'll be the first to admit that from a stock appreciation point. However, nearly all of my claims regarding the progress the company would make have panned out, albeit slightly later than expected as there were delays of about one quarter.
Let's give a quick recap of how far Uni-Pixel has come in the past 12 months:
- Back in early December 2012, Uni-Pixel announced its first "Preferred Price and Capacity License Agreement" with an anonymous PC OEM later described as a Fortune 100 company and oft rumored to be Dell.
- Shortly thereafter, Carclo, a UK based copper metal-mesh competitor working with Atmel (ATML), sued Uni-Pixel for stealing their ideas. This lawsuit is ongoing and, given that they are still debating over the location of trial (UK or Texas), I highly doubt it will be ruled upon anytime in the next year. Even with a negative ruling, I wouldn't expect it to substantially hurt Uni-Pixel.
- On April 8th, Uni-Pixel signed a multi-million dollar "Preferred Price and Capacity License" with an anonymous ecosystem partner later revealed to be Intel (INTC) (Oct. 2nd).
- On April 16th, Uni-Pixel signed a manufacturing partnership with Kodak with undisclosed terms. The two companies have been diligently working together to build out a second manufacturing facility in Rochester, NY (more on this later).
- On April 18th, Uni-Pixel successfully closed a $38.2 million stock offering, guaranteeing their cash needs for the foreseeable future until they would (hopefully) be self-sustainable.
- In Q1, Uni-Pixel received $5M from the PC OEM for meeting certain milestones. It is expected that they will receive an additional $5M+ in Q4 for meeting additional milestones. Uni-Pixel also received a deferred $5M from Intel in Q2, and is expected to recognize this revenue and possibly receive an additional $5M in Q4.
- At the end of May, there were reports of delays regarding the qualification process, and essentially the entire process was put on hold for three months as Uni-Pixel hammered out the details, ran more tests, gathered more data, and put a larger emphasis on testing.
- Then, in September, Uni-Pixel announced that UniBoss was being rebranded with Kodak as InTouch Sensors.
- Finally, last and certainly not least, on November 7th Uni-Pixel announced the receipt of not one, not two, but THREE Purchase Orders (POs). Note that only one is discussed in the PR. The other two were discussed on the conference call later that afternoon.
Clearly, Uni-Pixel is NOT the same company it was one year ago. It went from purely developmental to signing multiple contracts, receiving multiple purchase orders, and (not mentioned above) increasing their employee count from 25 to 42 with specific hires of Sales Manager Robert Berg and Chief of Manufacturing Robert Rusenko - both of whom are highly regarded in the industry.
But why hasn't the stock price reflected all of this progress? (good question!) I honestly couldn't tell you, but there are clearly significant doubters out there. Case in point, the short interest is currently at an all-time-high of 5.99 million shares (their are only 12 million shares outstanding, less in the 'true float'). A little closer to home (for Seeking Alpha readers), there continues to be several negative articles released on Uni-Pixel in the past few months: here, here, and here.
Leaving the Bears Bare
Whenever I am investing in a stock, I always like to read about the potential, but also about the pitfalls. The 'bear-case', if you will. There are always two sides to every story (hence why we have a market), and if I can't poke-holes in the bear case, then I clearly am just gambling, not investing. So it is important to see if these shorts have any solid reasoning behind them, or if they are simply spreading FUD.
Starting with the 3rd article (September 27th) listed above, here are some key points and counter points:
- "We believe it is clear that UniBoss, now repackaged as "InTouch Sensors Powered by Kodak," cannot be manufactured and that Uni-Pixel has another failed product on its hands." - the three POs that were announced less than 1.5 months after this article clearly disproves this point.
- "Uni-Pixel no longer expects revenues in Q4" - On the most recent CC on November 7th, CEO Reed Killion was adamant that shipping would occur in Q4 2013 and that revenues would be recognized upon shipping. Clearly the CEO thinks that revenues are still expected in Q4, and the three POs support that.
- "The competition has passed Uni-Pixel by [receiving POs earlier]" - Yes, many other ITO-alternative companies have received POs, but so has Uni-Pixel now. The market is very large and, realistically, these non-ITO producers are not competing with each other (yet), but with the incumbent ITO. I'm not worried about competition at this point, especially since Uni-Pixel has the cheapest cost structure (more on this later)
The 2nd article (October 14th):
- The main thesis in this article is that short-term earnings may disappoint (although any knowledgeable investor knows they will be negative since production is just now starting). The conclusion is quite stunning, so I will post it here in full:
Uni-Pixel could be an important player some day, but we need to see the hard numbers first. If sustainable sales start rolling in, there will be plenty of time to become an investor here. Next year's estimates, if they pan out will make the company an eye-opening opportunity. But that's an "if" we need to wait for.
Now that Uni-Pixel has received three POs, I wonder if the "if" no longer needs to be waited for. I would like to note that "next year's estimates" refers to the approximately $2.50 in EPS predicted by analysts for Uni-Pixel in 2014, which would garner a $50 stock price even at a relatively low 20x P/E.
Finally, the 3rd article (November 7th) brings up some reasonable concerns, albeit in a very confusing and odd manner (this same author believes that Atmel lied about shipping touch sensors through Carclo to Asus as proved by the authors travels to several different countries viewing product on shelves with a magnifying glass):
- Yields - the author concludes that Uni-Pixel has yields of 30-50% based on a quote from the CEO regarding a hypothetical situation. The issue is that there are two types of yields: pre-shipment and post-processing. Hypothetically (that means that the following numbers are made-up), if Uni-Pixel has 80% yields when they manufacture the sensors, but only 50% of those survive the shipping, laminating, tab-bonding, etc. process, then the true yield is only 40%. Uni-Pixel's CEO was stating that their goal is to test every sensor before shipping so that they can guarantee every sensor shipped to be laminated, thus knowing where the fault lies and allowing for improved future yields.
Realistically, I don't know what Uni-Pixel's yields are (70% has been tossed about, but some believe it is lower), and I also don't think it is too important at this point (hear me out....). As long as Uni-Pixel knows which sensors are good and which are bad, a low yield only affects margins. Given that the cost of production is minimal at < $1, even 50% yields, which would double this cost, still result in a huge margin. Finally, regarding post-processing yields, the CEO stated on the most recent CC that InTouch is much stronger and sturdier than ITO and has as good as or better than yields than ITO at this stage.
For what it is worth, lets discuss some recent steps that Uni-Pixel has taken to analyze and improve yields. Originally, all sensors were hand-tested, which was obviously slow and tedious and probably allowed a lot of 'bad' sensors to slip through the cracks. Around September, Uni-Pixel installed semi-automated testing equipment to help test more sensors and gather more data, allowing them to hone in on and improve faulty aspects of the manufacturing lines. Finally, Uni-Pixel recently ordered a fully-automated roll-to-roll tester so that they could test every sensor as it came out of the plating line. Before installing this machine at their facility, they tested it at the manufacturer for two reasons: 1. They had to make sure it worked. 2. They wanted to see if there were any issues happening during the shipping process from Lufkin, TX to wherever the testing machine was located. My understanding is that they discovered there were some issues occurring during shipping (since it wasn't laminated yet, which typically protects it), and they promptly solved this issue. Now they have ordered multiple fully-automated testing machines to be installed in the Rochester, NY facility in the December time-frame. I don't think yields will be an issue going forward.
2. The author believes that the original samples of InTouch (then UniBoss) were "rejected" due to a flawed product and that InTouch doesn't work - This thesis baffles me. Firstly, even if you assume the worst case scenario for any previous samples, clearly those issues were resolved since the very same PC Manufacturer that "rejected" them has now placed a PO. Secondly, the author himself has an mp3 file that clearly dictates that the samples were only "rejected" because the PC Manufacturer asked that they be redesigned to fit a new/changing product, not because they weren't functional. The author's argument is akin to claiming that Best Buy only sells broken products because one time somebody bought a laptop, then returned it the next day to buy a desktop instead.
3. Price competitiveness. The theory here is that pricing for ITO sensors has come down significantly, thus removing Uni-Pixel's price advantage. This argument is probably the most reasonable in this entire article, and therefore I will talk about it below.
Hopefully it is clear to readers that, except for possibly price competitiveness, these short articles don't hold any water. Let's not forget all of the other short articles from earlier in the year stating that Uni-Pixel will never be able to properly manufacture InTouch, will never receive a PO, and will never ship product. Again, clearly they have all been wrong. So lets discuss pricing:
Competitive Pricing: Are costs sinking or sunk?
There have been recent reports that touch supply is no longer an issue and pricing is falling dramatically. This is largely true, but it isn't the full picture. In a nut shell, what is happening in touch sensors is very similar to what often happens in the energy (oil / natural gas) industries. In order to build out a fully functioning, qualified manufacturing plant for ITO touch sensors, it costs hundreds of millions of dollars. For Uni-Pixel (and other ITO alternatives), it costs well under $50 million dollars.
So what has been happening recently is that as demand has risen for large touch screens, various companies have dropped their pricing in order to gather market share. A pricing war began and now many ITO touch companies have either dropped out or are selling their product at a loss. Now, to be clear, when I say they are selling it at a loss I don't mean that it costs them (hypothetical numbers...) $30 to produce and they are selling it for $25. What I mean is that it might cost them $15 to produce and they are selling it at $25, but this small $10 profit is not nearly enough to offset the hundreds of millions spent on capital investments. The net IRR of the whole product will be negative, but instead of losing $100 million they might only lose $10 million.
However, as the machinery depreciates and they need to sink in another significant capital investment, they'll opt not to do so unless pricing rises back up first. This causes supplies to drop even as demand remains high, thus causing pricing to increase. Again, you see this all the time in the energy markets which is why oil or gas will often trade below the cost of extraction - the sunk costs are so large that the companies don't have a choice until the well is dry. This is the nature of cyclicality.
So how does Uni-Pixel fit into this crazy pricing competition? Uni-Pixel not only has a significantly lower cost for capital investments, but also has a very low cost of production for each individual sensor due to the minimal number of steps and vertical integration (Kodak provides the film itself). So while Uni-Pixel may have to lower its price in order to stay competitive in the short term, it will still maintain relatively large margins, be profitable, and simply gather more market share. This last part is important - As Uni-Pixel lowers its pricing, it will only gather more market share, thus having a larger volume of production offset smaller profit margins. For the majority of it's competitors (especially ITO), not only will profit margins be negative, but volumes will also continue to decrease since the quality of the product is sub-par compared to metal mesh.
Mapping The Future
At this point, I hope it is clear that not only have the bears been consistently wrong with this stock so far, but none of their current theories are sustainable either. So where does Uni-Pixel go from here? Why haven't the shorts covered?
Based on my conversations with various investors, it still seems as though many people are afraid that Uni-Pixel might be a scam or a fraud. It is impossible to prove that it isn't until Uni-Pixel has significant earnings, but I think most of us here want to make the correct investment BEFORE Uni-Pixel has significant earnings so that we can ride it up, not buy-in when it is already much higher. So is there any evidence that the company is or isn't a fraud?
I think that the clearest example that Uni-Pixel is not a fraud is who they have aligned themselves with. We know they have a "PC" partner and an "Ecosystem" partner. At first, some people said that they didn't actually exist, but we now know that the Ecosystem partner is Intel, as rumored (which also gives credence to the rumor that the PC partner is Dell). We also know that Uni-Pixel is working with Kodak. There have been many investors who said that Uni-Pixel is simply "leasing space" and that the partnership is meaningless, but we now know that Kodak has 40+ employees working full-time on InTouch, has dedicated ample resources, and considers touch, and Uni-Pixel specifically, a large part of their future. Furthermore, not only was UniBoss rebranded as InTouch, but as InTouch, Powered by Kodak. A little odd for a company like Kodak to put their name directly on a product that they think won't work, right?
On top of these three, there is also Synaptics (SYNA) who has mentioned Uni-Pixel by name on several occasions in a positive light. Synaptics admits to having tested InTouch and used it in prototypes and has been very pleased with the results. Why would the #1 Touch Controller company do that for a fraud?
And finally, we now have three different companies who have all tried and tested InTouch and decided that they want to buy it. This is three different companies that have performed extensive due diligence on the quality, the operations, the manufacturing, and the competition, and decided that InTouch seems the most interesting. And the shorts come out saying that these purchase orders don't actually exist, just like how "Dell" and Intel and Kodak don't actually exist. These three purchase orders not only prove that Uni-Pixel will be successful, but they also prove that InTouch is still very competitive at current pricing. Remember, nobody gets bonus points for being the first to a new technology that isn't any better than the old technology. If ITO is just as good as InTouch and just as cheap (or cheaper) and is tried, true, and tested for many years.... then why take a risk on a brand new company/technology?
Clearly Uni-Pixel is a legitimate company with a very competitive product that has a bright future. But how bright? In order to determine a fair price for the stock, not the company, we need to discuss future earnings.
Ramping It Up
We know that Uni-Pixel previously expected to sell InTouch for around $20 per square foot, but let's conservatively use $15 (for what it is worth, analysts don't seem to expect pricing to get this low until 2015, but it is good to be conservative). The cost to produce is very small, even with low yields, and we will estimate it is around $3 (again, conservative). This amounts to $12 profit, which is then expected to be split in some "equitable" way with Kodak. Uni-Pixel stated at one point that a 50/50 split is the absolute worst case scenario, and, to be conservative, we will stick with 50/50. This equates to $6 in profit for Uni-Pixel per square foot sold.
So how much can they sell? One issue investors seem to be having with the recent purchase orders is that it wasn't specifically disclosed how large they were. And yet, if you pay enough attention, the sizing is actually very apparent, at least at a minimum. CEO Reed Killion specifically stated that two of the POs are very small, and will only amount to around 100-150k units per year. One of these POs is for a 15" monitor type device whereas the other one is for a 23" AiO (All-In-One). It was also stated that the 3rd PO was "substantially larger" than these (and thus deserved a PR, implying that it is material while the other ones are not), so I will estimate that it is around 600k units per year. This amounts to around 700k units per year or $4.2M in gross profits.
Now, none of these numbers seem that large, but remember that these are all initial purchase orders for a new technology. Assuming that everything goes smoothly, it would be expected that the follow-up orders would be substantially larger. Furthermore, it was stated that Uni-Pixel currently has 20+ engagements with other companies that are all in different stages from testing, to prototypes, to negotiations. I would also assume that many of these 20+ engagements are waiting to see if any of the original POs are re-upped since they probably don't want to take on the extra risk of dealing with a new technology.
So how quickly can Uni-Pixel ramp up production? My expectation is that there may be one or two POs announced this quarter (Q4), with the majority waiting until 2014. I would expect that "Dell" will place a significantly larger PO in Q1 2014, which would then trigger a waterfall-type effect as other potential customers gain faith in Uni-Pixel. Each SKU represents the potential of 100k+ units per month for "high demand" items and 10-20k units per month for "low demand, high-end" products. Each customer can have multiple SKUs. In my previous articles I highlighted several reasons why it is not unreasonable to expect Uni-Pixel to be shipping 1 million, 2 million, 3 million, or even more units per month by the end of 2014. After all, there is a reason why both "Dell" and Intel requested that Uni-Pixel reach an initial capacity of 1.3 million units per month. Killion himself stated that the current Kodak facility has room for approximately 3 million units per month of production, yet Uni-Pixel is already in discussions with two different possible manufacturers in Asia in case they need to expand faster (one in China, one in Korea - rumored to be Samsung).
If we use 1.5 million units per month as a baseline production amount by Q4 2014, then we can expect Uni-Pixel to be at a run-rate of approximately 1.5*12*6 = $108 million in gross profit. Remove $20M for OpEx, 30% for taxes, and divide by the fully diluted share count of 15M, and you get $4 in EPS in 12 months. For what it is worth, the analyst average EPS for 2014 is currently around $2.50, but this includes the slower Q1 and Q2. If we assign a conservative forward P/E of 20x, this math suggests that the stock should currently be trading between $50-$80.
And remember, I was fairly conservative with pricing, yields, P/Es, etc. For those that believe there is no way this $14 company could be worth $80, just remember that this only amounts to approximately a $1B company, which is still very small.
I hope this article has served its purpose in clearing up much of the confusion surrounding this tiny company. If you have any further questions or a serious contention with something presented within, please send me a PM or leave a comment below and I'll do my best to expand and clarify on the point. Thank you.