Energous A Once In A Lifetime Risk/Reward Opportunity

| About: Energous Corp. (WATT)

Summary

Energous is a risk/reward attractive investment that can either go to zero or skyrocket as a real game changer.

To analyze the risk of Energous I evaluate the product, business model, management team, revenue and cost management and the status of regulatory affairs.

The product and management team spur confidence, but patent protection and regulatory approval are the main risks.

The risk of investing in Energous (NASDAQ:WATT) will be analyzed using some of the key variables, namely: product, business model, management team, revenue and cost management and the status of regulatory affairs. Each section shall be rated between one ("very risky") and ten ("very safe"). While there is a subjective component in each rating, it should be considered as indicative of personal views on areas where work still needs to be done.

To analyze the potential reward I will provide a bit of color on the market size for wireless charging.

Product

Most of the evidence available tends to indicate that WattUp works. They have demonstrated their product at CES15 and CES16. They also are receiving milestone payments from a partner and have been able to develop a receiver that is very cheap, just 3mm x 3mm in size, and much better than the inductive coil that can be seen, say, in the Apple Watch.

They also recently went through a process to independently validate the performance of their product from Underwriters Laboratories. Although the conditions in a laboratory cannot replicate the conditions that might be found in real life, the ability to get an independent certification is enough evidence that the product works. Given that this technology is in its early stages there is still time for it to be improved in the future if necessary.

Energous recently demonstrated at CES16 a USB-stick-sized transmitter that works with the same technology but for a shorter range of up to around six inches. This product can be built to replace existing chargers that come with the purchase of wearables, without significantly increasing their cost. Even though this is not the ideal solution, it might still be much better than the coil for inductive charging that is found in items like the Apple Watch.

Some leads tend to indicate that Energous is ready for production. One of them is the fact that they just hired Jeff McNeil, the former Cypress Semi's SVP of Operations and a 21-year experienced professional, as VP of Operations. Energous also shared that they contracted TSMC to manufacture their products. Being ready for production is a significant milestone for a company like Energous. It means that Energous believes their product is ready for commercialization, they are confident they will have their first customer, and will get FCC approval.

Some people claim that Energous is a scam, especially the author of "Energous: don't buy the companies story or stock." During the past few weeks, this article created many controversies, leading to a conference call by Energous where they refuted the arguments from the article. Claims have been made that the real purpose of the article was just to push the stock price down, especially because an anonymous author wrote the article. There does not seem to be much merit in the article, and the statements Energous has made so far are credible. However, if someone wants to invest, the best they can do is read everything they can find and make their judgment. It is difficult to believe that Energous' product does not work, especially after they demonstrated their technology at CES15 and CES16. Scamming so many people is not only difficult, but it is also punishable by law because Energous is a public company.

Regarding product design, while the receiver is extremely small, the transmitter for a long-range product is still a bit too big. Energous claims they can make it smaller, but a demonstration at CES16 detailing their capability would have been more credible. They will have achieved the right size when the transmitter for a 15ft range can be embedded in an Apple TV, Xbox or TV, without a considerable impact on the size.

The product is rated 8 out of 10.

Business Model

Energous has decided to work on a licensed business model. While this can generate very high profit margins, Energous needs to rely on a sturdy patent base.

WattUp has filed applications for around 200 patents, but so far it has only been granted four utility patents and two design patents. When looking at the dates of application for many of them and the time it usually takes for them to be granted, it is expected that many patents will be granted within the next six months.

Whereas it is one thing to be granted many patents, being enough to protect a business is something entirely different. Many competitors are trying to build wireless charging solutions, but so far it seems that only Energous and Ossia have the technology that can wirelessly charge devices from a considerable distance. Products from both companies seem to be very similar. Ossia is privately funded, and it seems that Energous is a bit ahead, but it is not clear whether that advantage is significant enough or if they will be able to maintain it over the long haul.

The business model is rated at 5 out of 10 because the license model has a personal appeal. It is also given this rating because although WattUp has filed many patents, it is still not clear if this will be enough to protect the business, since there are other competitors with similar products and many filed patents as well.

Revenue And Cost Management

Energous has signed a development and licensing agreement with a top 5 tier 1 consumer electronics company. Rumor has it that this company might be Apple (NASDAQ:AAPL), especially after a Bloomberg report from last week indicated that Apple is working with partners in the US and Asia to develop a long-distance wireless charging solution.

This tier-one partner paid $2 million in the third quarter, based on development milestones achieved by Energous. In addition, according to the last investor conference call, the company expects to continue generating revenue from this investment.

Energous will be burning $5 million to $6 million each quarter and has enough cash until the third quarter of 2017 where, approximately around that time, they expect to break even. In some of their reports, they claimed that they will start increasing costs in the subsequent quarters as they move from development to execution, but also claimed that the cost increases would be more than compensated for by higher revenues coming from development agreements with their partners.

Currently, Energous only generates revenue from the tier-one company, but it has signed agreements with other companies through which additional revenue be obtained before it can launch a product by the end of 2016 or the beginning of 2017. It is expected that revenue will increase once they announce the results for the fourth quarter. Although this would be an indication that things are going well, a better situation would be if revenues were coming from multiple companies. However, that is not expected to happen.

One element of concern for many investors is the high salary of the CEO. In 2014, he had compensation of around $2 million, out of which the majority was in stock options awarded at $0. One way of looking at this is by considering the pure numbers, but another way is by looking at insider transactions. Stephen Rizzone has bought stock numerous times and there have been no substantial sales. Since the stock of the company could go to zero if they do not receive FCC approval or commitment from a customer, the value of Rizzone's stock depends on the value obtained when they are sold (which has not been done so far) or on the expected future value while the shares are being kept.

The revenue and cost management section is rated 6 out of 10. Although the revenue being generated may be a reason for celebration, they are still significantly lower than the development costs. In principle, the company does not need further funding, and more dilution is not expected. However, this is yet to be seen. This rating might rise considerably if there is a generous increment in revenues during the fourth quarter of 2015 and the first quarter of 2016.

Management Team

Energous seems to have a robust management team, with many of its professionals having extensive experience. The CEO has a proven track record, and so do many of the top managers. The fact that Michael Leabman, the founder and CTO, is not the CEO is a good sign. This implies that the company endeavored to find the best possible CEO, disregarded the emotions tied to founding the company, and acknowledged the strengths of everyone in the team.

It is quite encouraging for the Board of Directors to include Martin Cooper, the "father of the cell phone." In general, there is a good balance of expertise in the board, with experts in technology licensing businesses, financial knowledge, strategy, and corporate counseling.

The management team is rated 8 out of 10.

Regulatory Compliance

This is by far the riskiest part of the business. To be able to launch a product Energous needs to get FCC approval for their technology. While the management team seems to be very confident they will achieve it, they are also cautious in most of their communications.

One positive aspect of the development and licensing agreement is that the tier 1 partner takes the responsibility for the FCC approval. This is a very lengthy and expensive process, and the partner is supposedly experienced on that front.

Energous has built a laboratory in their facility which can be used for the simulation of the FCC tests. This should have a positive impact on their chances of approval.

The regulatory compliance gets a 2 out of 10 rating.

Potential Upside

So far, this article has endeavored to discuss the risks in the various parts of the business. Being that Energous is still in startup/development mode, there are many risks and uncertainties in their business.

On the other hand, there is a huge potential market. 1.4 billion smartphones are expected to be sold in 2016. The market for wearables will be of around 100 million units. When security, toys, gaming consoles, remote controls and other items are added, the total market opportunity is enormous, and that is only if the receivers are counted.

Belkin might be a great partner and business opportunity, especially for the short range solutions. They could not only manufacture WattUp powered chargers or USB-like WattUp powered sticks, but there might also be a market for standalone receivers that are plugged into the ports of smartphones to make them "WattUp enabled."

Transmitters could be built into computers, TV's, routers, gaming consoles and home appliances to create a wireless powered home and office. The market size is almost infinite, making it irrelevant to mention numbers.

Apple sells around 250 million iPhones annually. That product only might generate hundreds of millions in revenue and value the company in the low billions. Although I would personally be very happy with Apple being the tier 1 partner, if it is Apple or any other of the top 5 doesn't really matter. As long as this technology is embedded into smartwatches, the potential is huge. According to research from Roth Capital, in 2020 Energous should make $6.44 earnings per share. This could place the value of the company at a position 20 times higher than it is today.

Making assumptions regarding Energous' potential does not make sense because of its immensity. Today, the company is valued at around $80 million. If all goes well, there is no reason this company should not become a $2 billion-$5 billion company in two to four years.

While there are still many risks and uncertainties ahead, the risk-reward ratio is heartening. A person deciding to invest in Energous could lose all the money invested, but it is also possible to reap huge results.

The ratings may be challenged and evidence added in the comments section!

Disclosure: I am/we are long WATT, AAPL.

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.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.