First Of Many HP Printers With Neonode Touch On Sale; Bloated Shorts Begging For A Squeeze

Apr.29.14 | About: Neonode, Inc. (NEON)

Summary

Hewlett Packard's first three printers (8610, 8620, 8630) with Neonode's touch technology are now available online and via PC channel distributors, and will hit retail shelves imminently.

These printers are the first of 20+ HP models, which will be rolled out over the next two years, eventually growing-into a $15M+ perpetual annuity for NEON.

The short position on NEON has ballooned to an obscene level of 11.35M shares, which represents 10+ days to cover, and 35%+ of the float.

With NEON's Institutional ownership at 65%+, and insider shares close to 20%, the inevitable PC-driven short-squeeze will be ugly, as there will be insufficient shares available for covering.

Hewlett Packard's (NYSE:HPQ) first three printers (8610, 8620, and 8630), which integrate Neonode's (NASDAQ:NEON) optical infrared technology, are now on sale online and/or through the distribution channel.

The distribution channel includes companies like PC Connection (NASDAQ:PCCC) and Ingram Micro (NYSE:IM), and can be accessed by calling HP's Small Business sales and customer service number at 866.625.0242.

Currently, the 8610 (MSRP is $199) and the 8620 (MSRP is $299) is available on more than a dozen websites, such as Rakuten's (OTCPK:RKUNF) Buy.com, NextWarehouse.com, and Adorama.com.

According to the distribution-channel vendors I spoke with (e.g. Ingram and PC Connection), these 3 models (8630 MSRP is $399) are replacing the high-volume 8600 series printers, which are currently being wiped out of inventory at retail, while the distribution channel (which captures 95% of manufactured inventory) is consistently being built-up and supplied. According to these distribution-channel sources, since the 86xx-series models ship low-to-mid 7-figures per-annum, inventory rampdown takes time (9 months since last production run) and is carefully modulated by discounted sale pricing (started in retail during December 2013).

Moreover, HP Direct (HP's online store) accounts for the remaining 5% of production, and will be the absolute last site/location to roll out the new printers, so that they can finish blowing out the 8600 inventory (which had its end of life production run in July 2013).

Meanwhile, Neonode management further indicated (on the Ascendiant investors call and at the Needham conference in January) that the next rounds of printers (additional models and families) will be launching in both the spring and summer.

More importantly, investors seem to be missing that these launches conclusively and unequivocally prove that Neonode's "HP Printer Annuity" has finally commenced. This annuity, which will likely keep expanding through 2016 (about $3-4M in 2014, $10M in 2015), will ultimately eclipse $15M annually.

A recent Vishay (NYSE:VSH) presentation (which claimed that Neonode has won all of HP's printers) confirmed that Neonode has landed all (or likely most) of HP's printer business.

According to IDC, as quoted in Neonode's recent press release, HP ships 44M printers annually, in a market that is about ~112M units large.

With blended ASPs likely trending down to ~$0.50 (due to volume discounts and implementation size-mix), the HP Printer business alone should turn into a $15M annuity in 2016, and persist through at least 2018.

With others like Epson (OTCPK:SEKEY), Brother (OTCPK:BRTHY), and Canon (NYSE:CAJ) likely signing up this year (their new printers would not start shipping until 2H16), Neonode's printer annuity could easily grow to $25-30M by 2017.

Thus, I am re-affirming my 12-month price target of $15, which is based upon a sum-of-the-parts analysis of the core operating business ($13 per share) and the User Interface patents ($2 per share).

My conservative 2015 earnings estimates for Neonode are revenues of $70M:

  • Printers = $10M; equates to 20M HP units @ a blended royalty of $0.50
  • PC = $48M; assumes 16M laptops, AiOs and monitors @ a $3 royalty
  • Auto = $3M; assumes 600K units at a $5 royalty
  • eReaders = $5M
  • Children's Tablets = $3M; includes LeapFrog (LF-NYSE) and a second unnamed Tier-One OEM
  • NRE = $1M

I am assuming almost nothing for cases, which could easily become the biggest source of upside. Logitech (NASDAQ:LOGI), Zagg (NASDAQ:ZAGG) and OtterBox could definitely use Neonode's unique, disruptive, and extremely inexpensive proximity sensing solutions. Nothing drives me more nuts (other than NEON's volatility) than not having a (virtual) mousepad when I use my Apple (NASDAQ:AAPL) iPad in a laptop-like content-creation configuration with my otherwise-amazing Zagg case.

With operating expenses of $20M, pretax income of $50M, taxes of $15M, net income of $35M, EPS of $0.87, and a P/E of 15x. This equates to a 12-month target of $13 for the core optical touch licensing business.

It seems like it is time for the shorts to run for cover!

Disclosure: I am long NEON. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.