Papa's Q4 Tech Top-Up

 |  Includes: ADTM, GOOG, HIMX, MSFT, SNE
by: Papa of Four

(Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.)

I normally try to avoid writing articles about companies like Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG), there are enough fan boys out there. I prefer to find stocks that represent a small dollar risk and offer a larger percentage return. My hope is to bring these to your attention early and does require patience on your part. This is in no way a "pump and dump" piece as I fully intend to keep positions for multiple years. I may trade in and out of a position but normally to accumulate shares. Apple, Google, Facebook (NASDAQ:FB) and others have been included in this article as they relate to the two stocks covered. The progress of these two companies is materially relevant to some of the largest names in tech and therefore cannot be ignored.

Mimvi [now Adaptive Media (ADTM)] releases Q3 results.

Ho ho ho, merry Christmas!

To be honest, earnings were a bit of a disappointment, not as good as I had hoped. Hindsight is 20/20 and in reflection, perhaps I was looking for a little too much too soon. In my article ahead of earnings, I had said I was looking for EPS (0.01). For those of you who want to read the whole 10Q here it is.

For the 3 months ending September 30th, the upshot was:

  • Revenues of $373,737
  • Gross profit of $158,578 approx 40%
  • EPS (0.02)

I had hoped for an EPS of (0.01) so let's look at where the money went.

(0.01) per share. General and Administrative Expense increased by $932,116 compared to the same period in 2012. However this was 1.77 million less than in Q2 2013. I assume that much of this expense has been related to the Adaptive/ Mimvi merger. Going forward I would like to see General and Admin, regularly below $600k for a quarter. It is important that we can establish a base line for exactly what op-ex is. I fear that it will be no clearer in Q4 due to the Ember deal.

(0.005) per share. Stock compensation expense increased by $552,178 compared to the same period in 2012. Expect this number to be high in Q4 also.

In addition there was $100K which was attributable to severance agreements. 10K of which will be billed in Q4, as well as a $55K stock issuance.

Legal and Professional Fees increased by $167,709 compared to the same period in 2012. Again we should expect this number to remain high in Q4.

All in, I can find about (0.0175) per share that I would like to see gone by the end of Q1 2014. On the bright side there is almost 400K of prepaid expenses and let's not forget revenues!

Q4 guidance was positive "Longer-term shareholders have been waiting to see sales accelerate, and that happened in Q3 with revenues growing almost 14 times the Q2 report while maintaining gross margins at greater than 40%. Investors are beginning to see the benefit of the new leadership and business focus, and can expect to see continued growth in Q4 and beyond. The Q4 trend is solid, and we expect to show particularly strong growth in the mobile and video segments of the business." Qayed Shareef.

The last line of that statement is particularly encouraging. Video is the golden goose of online advertising. Real growth over the holiday period could see revenues double or even triple from Q3. Although many companies have their season ad budgets allocated well in advance, the opportunity to rake in a few bucks from last minute sales still exists.

From browsing the message boards and responding to messages, it appears that share dilution is generally the greatest concern for most investors. The company has a "Consultant Stock Plan" which was adopted on February 5, 2013 and reserved 2,000,000 shares of the Company's common stock for issuance. Essentially this has allowed the company to pay consultants for their services in common stock instead of cash. The Ember acquisition was announced "the all-stock transaction is expected to be signed in the fourth quarter of this year." and further increased dilution fears. Until I hear otherwise, I view the Ember deal as accretive. Ultimately the deal should increase EPS more than the dilution hurts. If this is not the case, why bother doing it? The CEO is the single largest shareholder of Adaptive, and dilution hits his pocket the most.

If we can finish Q4 with revenues around $700K, EPS (0.02), the Ember deal done and shares outstanding around 150 million; we will be in good shape and making money by Q2 2014.

Last article I also talked about the possibility of a buyout by Google, Microsoft (NASDAQ:MSFT) or Facebook. I must apologize as I forgot to add Yahoo (NASDAQ:YHOO). Since CEO Marissa Mayer took over, Yahoo has purchased 23 companies. Her aim is to expand the company's revenue stream and is trying to position them for growth. One of her main areas of focus is mobile. Adaptive could help with mobile monetization across multiple platforms. Not a bad fit, however that last time I suggested Yahoo should buy anything they ignored that email too. I did suggest that they might want to buy Netflix around $20 back in November 2008. I think that they were busy with another Microsoft merger that was never going to happen.

Alibaba has worked out well and they should have some excess cash on hand even after the $5 billion buyback they announced this week. I would argue that a buyback does not expand revenues and the money would have been better spent on an Adaptive Medias.

In my next article I intend to do a full comparison with Rocketfuel (NASDAQ:FUEL) which had its IPO earlier this fall. Both companies are competing in a similar space and I feel the Rocketfuel properly demonstrates the path that Adaptive is on. It may take a few years for Adaptive to fully realize their potential but they are definitely on the right track. I prefer to be in there, in a small way, from the beginning instead of waiting for everyone to pile on. The same was true when I first started writing about Himax Technologies. Since my first post about Himax in August 2012, they have come on in leaps and bounds. At first no one paid any attention to the Taiwanese manufacturer. They now have a growing fan club of investors that includes Google. As you will see in the next portion of this article they are still on the way up. I have been long Himax from $1.58.

Himax Technologies (HIMX)

Q3 earnings results were pretty good, so how come we have not really gone anywhere?

The answer is pretty simple, earnings were basically in line. They showed great improvement from last year. When you look at then relative to price performance over the past twelve months, you have to admit they were pretty well baked in.

In my article Is Himax Overbought?, which I released prior to Q3 results, I suggested we had got a little toppy. I was keen to emphasize that long term I still saw Himax as a great investment but was expecting a pull back from its new 52 week highs. I had suggested that we could go as low as $7.80 which I later revised via Instablog to $8. I feel that the recent low of $8.13 should be the extent of the selling and sets us up nicely for a move higher.

I stated that "I still see HIMX finishing the year above $12 and continuing to grow for years to come.", so let's have a look at how I see us getting there.

It's Christmas

With only 34 shopping days to go we are rolling into that time of year, when we get hit by a barrage of updates. The latest sales figures from Apple, Samsung (OTC:SSNLF) and Motorola. How many Playstation 4's will Sony (NYSE:SNE) sell? Will they out do Microsoft's Xbox?

If you are invested in Himax, the truth is you really don't need to care. Central to my investment thesis on Himax, is just how ubiquitous they have become. They are in everything. I don't care if consumers buy an iPhone or windows phone: a desktop or a tablet; a TV or gaming console. Just as long as they are buying something, I don't have to pick the brand winner. The result is that each time we get one of these sales updates the markets should be throwing a few more cents at Himax. I feel that once we get past Black Friday and Cyber Monday, the stock will be off to the races again.

I know that projections for Christmas spending are down this year. In fact they have been estimated to be the lowest since 2009. I believe that regardless of the level of spending, the greatest portion of it will be on technology. Perhaps Mom and Dad cannot afford the newest luxury gadget, Himax supplies the less expensive options also. The world is hooked on tech and it's not going to change anytime soon. Couple that with even the inkling of a Santa Clause rally and it is easy to see how we get to $12 a 30% increase from here.

Other Catalysts

The most obvious is Google Glass. I have heard all kinds of projections ranging from 3.5 to 25 million units. I know that capacity will be at 25 million units once the expansion is complete, but I am not willing to venture a guess.

1 million units would be worth around 0.03 per share in earnings, so we will just say Glass will be worth a lot of money to Himax.

In an article earlier this year SA contributor Galileo Russel talked about the implications of a self-driving car and Google's rollout date sometime in 2017. I know that it's four years away, so follow my thinking. With Google Glass up and running, it seems likely that Google will try to put some form of in windshield display in their car. The system would obviously operate by voice command and could easily replace all those knobs and dials on your current dashboard. There is no reason it could not also be your Satnav, stereo and cell phone too. Got the kids in the back for a long journey? I'm sure we could see Netflix (NASDAQ:NFLX) on additional screens or windows. I'm not sure it's fair to compare it with Onstar so I will let you do that. Anyway, they are going to want to have a system like that past the prototype stage before 2017. We may see a simpler version of it becoming available over the next couple of years.

I have also made a couple of assumptions here. The first self-driving car will not run on gas. It would make absolutely no sense to produce anything but an electric vehicle. From controls integration to battery life, electric just makes more sense. From that point of view, it would just be a more complicated version of those 1980's robots that they built to run around a maze. I understand that Google has been talking to traditional auto manufacturers, but wouldn't Tesla (NASDAQ:TSLA) make a more viable partner? The second assumption is that any such display will greatly benefit Himax. I see no reason for Google to go shopping anywhere else, when they have just taken a 6.3% stake in Himax Display Inc. "HDI".

To round up the Google effect, we should also remember that Google has the option to increase their position in HDI to 14.8%. The one year time frame outlined in the initial agreement expires in July. Once Christmas is out of the way, I feel a decision will be made. I will expect to hear something by the end of Q1 or the beginning of Q2. Speculation will continue to drive the stock in the new-year, as this is a relatively near term catalyst. If that happens look for Himax to become even more integrated into Motorola phones, cameras, projectors etc.

Microsoft could be another major reason Himax moves higher. Since Microsoft bought out the handset portion of Nokia (NYSE:NOK), it follows that they are using Himax as a supplier. It would also make sense for them to be supplying something for the Surface too. I know what you're thinking, "neither of them sell very many units." How about the new Xbox then? Or more precisely the Xbox Glasses that Microsoft filled the patent application for. That may be some time off, but is just another feather in Himax's cap.

Perhaps you prefer the PS4, how long before Sony also decides that a glasses type controller is a must? I have yet to see a full breakdown, but am willing to bet that Himax is supplying Sony either the Media Accelerator and or the touch controller for the PS4.

Oculus Rift, this may be the direction that Microsoft wants to take its glasses controller. The launch date for the virtual reality gaming headset is still 2014. I am sure it will not be too long before we get a definite release date. Not in time for Christmas, but definitely a bonus for next year. Himax supplies 2 key components of the headset and long term this could be bigger than Google Glass.

Conclusions: I am willing to stick with both for now. As haschultz mentioned in comments to previous articles, there has been some interesting options price action for Himax. Noticeably in the $19 range with a March 2014 expiration. That coupled with Glass and Oculus Rift announcements, leads me to a new 12 month price target of $22.34, This is based off of a reasonable P/E of 25 and Glass units around 9 million. I said I would not speculate on how many units Glass would do and have just aimed at the middle of the road. I have not attributed anything to Oculus Rift to compensate and be conservative in my estimates.

Again I will repeat my warning with regard to Adaptive Medias. This is a micro cap stock, and any investment at this point should be considered as a total loss. To be clear, do not invest anything you are not willing to lose entirely. Q3 earnings show promise but, there is still a great deal that is unknown going into Q4 mainly surrounding the details of the Ember acquisition. For now I am content to hold a negligible position in hope of a sunny day next year. I maintain my 12 month price target of $1.20 for the new year.

Disclosure: I am long OTCPK:ADTM, HIMX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. This article may contain certain forward-looking statements. I have tried, whenever possible, to identify these forward-looking statements using words such as "anticipates," "believes," "estimates," "expects," "plans," "intends," "potential" and similar expressions. These statements reflect my current beliefs and are based on information currently available. Accordingly, such forward-looking statements involve known and unknown risks, uncertainties and other factors which could cause actual results, performance or achievements to differ materially from those expressed in or implied by such statements. I undertakes no obligation to update or provide advice in the event of any change, addition or alteration to the information contained in this article including such forward-looking statements.