Is Microvision Ready For a Big Fall? 19 comments
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The company is running low on cash (cash and equivalents were $16 million and free cash flow was negative $5.8 million in the March 2007 quarter). Given that the Company has never posted more than $16 million in annual sales (March ’07 revenues were down Y/Y at only $2.2 million), the likelihood of an external capital raise were questionable, at best. However, Microvision has 12.4 million warrants outstanding with an exercise price of $2.65 per share. According to the warrant provision, if the average closing bid price of MVIS averaged over $5.30 for any 20 consecutive trading days, then conversion can be forced by the company.
While this will provide Microvision with roughly $34 million in cash, it will also put 12.4 million registered and freely tradeable shares into the float. Given that the warrants specifically prevent cashless exercise, the warrant holders will have to exercise their warrants and immediately sell the shares that they receive in order to lock-in any profits. An analysis of the closing bid prices since May 21st shows that after Monday June 18th , Microvision can force conversion and collect the cash. Microvision now has a market cap of $350 million (not the $240 million shown on Yahoo or Bloomberg). Many investors have not factored in the additional warrants and thus the street’s understanding of the valuation has been skewed by the reporting of only basic shares.
OK…now that we understand that the company’s equity is likely to experience a massive dilution, we turn to an analysis of the company’s product offering (or lack thereof)…
Demonstrations of the PicoP projector at the CES show in January and the SID show more recently last month have investors speculating that the Company may be on cusp of a massive ramp in sales. Our checks with contacts in the laser industry leave us more skeptical. A look into the science of the PicoP projector reveals that the product is not mass manufacturable with the technology currently available. The PicoP relies on 3 very small lasers (red, green, and blue). The red and the blue lasers are not that tough and have been around for some time. The green, however, is another story. The three laser partners (Novalux, Osram, and Corning (GLW) are working on productizing green lasers, but to date, the technology is strictly for R&D labs only (cost is >$10,000 per system). Moreover, these three ‘partners’ are focused on the projection TV and Digital Cinema markets as their primary end markets.
This distinction is critical to understand, as the power requirements for a theater are much different than that of a cell phone. To date, no one has been able to produce a green laser on less than 3 watts of power (the total PicoP module with 3 lasers, the MEMS mirror, and the display controller chip needs to consume less than 2 Watts) and no one in the laser industry has ever built a production line for millions of units. This is why Coherent (COHR) licensed its laser technology to Osram in the first place.
While bullish investors may point to the massive potential of the Company, those in the advanced display community point out that the technology hasn’t changed in the past 10 years (display veterans may recall demonstrations from Laser Power Systems back in 1996) and the prospects for a portable, low power, and low cost laser system is still several years out. In reality, laser-based projection for any market (Digital Cinema, Rear Projection TV, or portable projection) is not expected to be commercially available until late 2008, at the earliest. Assuming the technological challenges of size and power consumption can be overcome, Microvision hopes to be able to sell the PicoP projector into the mobile embedded markets for as low as $150.
Given that this cost is greater than that of most of the devices Microvision hopes to be embedded in, the probability of deep market penetration is low. If the product can be manufactured in volume for less than $150 and there are manufacturers willing to pay that price, then the issues of image quality (less than 10 lumens) and usage still need to be addressed. To put things in perspective, one needs to realize that a low end office projector (that still needs the lights turned down) usually produces an image with over 1,000 lumens. To view an image of only 10-20 lumens, the room would need to be exceptionally dark and the viewer would need to be very close to the small image.
This begs the question of what is the application? Is this for viewing music videos on an i-Phone? Last night’s episode of 24? A powerpoint presentation? Pictures of the kids? The PicoP projector is a solution without a problem. MVIS is about to dump 12.4 million shares on the market and has yet to sign any large purchase orders for display products. Existing shareholders of MVIS need to decide if they believe the potential of purchase orders materializing sometime in 2008 justifies a willingness to hold the stock as it is diluted by over 25% this week. The primary driver behind the recent run in the stock is the hope that has been created by management that design agreements (not purchase orders) can be signed by late summer 2007. At a cost per share of $2.65, one has to wonder how committed the warrant holders will be interested in holding on to a company burning nearly $8 million per quarter and valued at more than 30x sales.
Disclosure: Author is a hedge fund manager that is short Microvision
MVIS 1-yr chart
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This article has 19 comments:
As you speculate, so do I. Could you be one of the original holders who thought you would get paid in stock (so you could cover) and are now being paid in cash?
The one thing I want to comment on is the CES mention. CES happened 6 months ago, and major advances have been made with the technology. At the end of May, Microvision presented their latest version of the PicoP projector at SID, sporting a WVGA resolution (854x480). I was impressed by the image quality at CES, and I was in awe at the quality presented at SID. Neither CES, SID or Microvision's booths were "exceptionally dark".
If you saw the technology for yourself, in person, you would not be short MVIS.
Since I am not connected in to the Institutional market the way you are, it is tough for me to comment on their demand for shares of MVIS. On the warrants not being called though, given the Company has less than 6 months of cash left, and will be burning significant ammounts for the rest of the year, not calling them and getting the cash would be rather stupid.
Since you are an expert on the Company and its technology, I am curious why you didn't address the larger point of the post: the questionable nature of its products and the real end demand if a product could ever be produced. With a fully-diluted market cap approaching $400M, MVIS is closing in on the Enterprise Value of COHR, the largest and most profitable laser company in the world. So what justifies this lofty valuation? Symbol, now part of MOT, had a laser projector for sale in 2002. Laser Power (bought by IIVI) showed a laser projector in the 90's. Silicon Light Machines (now part of CY) was working with Sony on a laser projector for many years. INFS, at one time the largest projector company in the world, had several laser and LED based projects that never made it out of the lab.. Please help me understand how MVIS, a much smaller company with far less resources, is going to succeed with a product that so far, no one seems to want.
Secondly, you are comparing apples to cumquats (excuse the spelling), but the pun is intended, as you will see. Lets consider NTRI. Had there been diet plans before NTRI? Certainly. Lets consider Apple. Has there been cell phones before the i-phone? How about google? Were there search engines before GOOG?
I'm curious how you can safely make a statement such as "with a product that so far, no one seems to want." This product, a miniaturized laser capable of fitting in a cell phone and providing a wide-screen viewing experience has never been marketed before. Of course, how could anyone "want" it when it has yet to be offered. A better argument would be, "What makes you think MVIS is going to succeed in getting a product to market in which previous companies have failed." But you didn't use that one. Regardless, it is faulty logic to assume that since others have failed, so will MVIS.
Yes, the stock is extremely overpriced for todays balance sheet, but since when has future performance not been considered in a stock? Many companies big and small are banking on portable projectors to be the next big thing; Texas Instruments, Epson and Philips to name a few. Now, it doesn't take much research to see that Microvision has the best technology, protected by dozens of patents, and is further along in development than any of these companies.
By all means, please short your brains out, I can care less.
I have to ask, because it is a rarity to see totally anonymous articles published here. I'm sure there have been others, but I can't think of any others that come to mind. Most of the authors at SA are identified by name, and even the ones that are identified by a pen name usually have a disclosure of their identity somewhere on their blog.
It is just so rare, and so out of place, to see an article written that is completely anonymous and not tied to another body of work.
SO! I ask again. David, do YOU have a position in MVIS?
Like many bloggers, some contributors to Seeking Alpha who don't have their own blogs want to remain anonymous, and we actually publish a fair number of articles that are totally anonymous. Other bloggers and contributors stay anonymous by using pen names.
In a conversation about this post, someone wrote to me that using the opening <i>An anonymous hedge fund manager submits</i> "subtlely implies the possibility of a manipulative motive". My personal view is that there's added risk with posts published without an author name, and we want readers to be on their guard, and to judge the article purely on the merit of the arguments it contains, not the authority of the author. We insist on disclosure of positions, and as you see the author disclosed a short position in the stock.
NO DooDahs Bill, of course I'm not the author of the article, nor have I ever had any position in MVIS. Take a look at the compliance standards for Seeking Alpha employees here: seekingalpha.com/about
I'd be interested to hear suggestions from the people in this thread on how you think we should handle the issue of contributions where the author wants to remain anonymous:
- Would you want us to accept contributions only from people who provided us with real names and verified them, even if that meant losing a large number of helpful articles?
- Should we try to provide more info about anonymous authors (eg. "money manager" or "hedge fund manager"), or less?
- Do you read any blogs that are anonymous, and what do you think about them?
Take a look at our compliance standards for contributors as you think about this:
seekingalpha.com/artic...
Best,
David
Founder, Seeking Alpha
It looks like the hedge fund manager was right, at least in regards to the warrants being called and a drop in the share price, which are very clear cut issues from the terms of the warrant and supply and demand. I don't know enough about the longer term chances of the company, but certainly it's the author's opinion (rather than the fact of the warrants) that the company should fall farther than a dilution would cause. I take that with a big grain of salt.
Also, what is the name of the senior technologist, and what is the name of the company?
What qualifies you to have access to such a person?
Again, I submit to you: which laser companies have you spoken to, and who is the senior technologist? This is really an issue as I could easily log in here under a new id and say that I spoke with a laser company's chief technologist and that the laser is ready for production.
Your argument "The problem is not in the PicoP, it is in the green laser, MVIS is pushing this too early so I believe they will not be the ones who bring such a projector to market." is illogical. I'm trying to determine how a company that is pushing a product to be the first will not be the first because they are pushing the product development.
Please, since you are approached all the time by competing "players" do tell us which competitor has a product at a similar size as the Pico P and that will run on 1.5 watts. Then, I would appreciate hearing which company your fund or IB is backing.
Motorola...ouch
Cash is moving around the world and stops to take profits when a stock is located that can be manipulated.
Sure, balance sheets can be figured out but are the numbers shown true?