Microvision: The Short Has Played Out

| About: Microvision, Inc. (MVIS)

Summary

The recent stock issuance implies that Microvision should not be trading above $1.70 per share.

The recent quarter disappointed investors and analyst. Microvision's powered product failed to meaningfully sell in a high shopping season.

After the recent drop of 40% in the stock, I turned cautious about a new short position.

While I recognize that I do not have the last word (or know the future) on any stock, my recent short-case deserves a follow up because my price target was met quicker than expected. I presented Microvision (NASDAQ:MVIS) as a short idea due to its fundamental business issues. My price target on the short case was $1.70, which happens to be the same price at which Northland Securities priced the recent stock offering. The offering validates my recent thesis and target price.

Think about it. Management is willing to sell stock at $1.70, which means the cost of equity capital is attractive at that price. Since management is (or at least should be) working for the shareholder, management would not choose to dilute shareholders to finance future projects, unless the dilution is decent compared to the amount of capital to be received. That is, management would only issue stock when shares are overvalued. That is basic corporate finance. If the stock is undervalued, and management issues shares, then the future earnings will not be accretive to EPS since there will be a larger share count.

In short, the stock should only be offered when shares are perceived to be trading at a premium.

Through the stock offering, management is telling the market that $1.70 for MVIS stock is a fair price, at best. I say "at best" because it could be the case that MVIS is grossly overvalued, which seems to be the likely scenario given the company's poor fundamentals and long history of losses.

The reality is that management doesn't really have an option about the method to raise capital. The debt market has already tightened due to energy related concerns and increasing rates. It's pretty much impossible for Microvision to raise any debt capital because its cash burn rate has exceeded $10 MM for quite some time. The only option is to sell stock using its ATM (at-the-market) facility. Given the stock price at the time of this writing, Microvision is actually issuing stock at a discount.

The capital inflow is crucial for Microvision, otherwise it will have to stop operations in the middle of the year. For several years, the independent auditors have been warning about Microvision's going concern status. In the most recent annual report, Microvision admits that it can only operate until June 2016 without raising new funds. In my opinion, the new capital will extend the life of Microvision for another year. Unless Sharp's RoBoHon gains traction in the marketplace, Microvision will probably sell more stock in the near future.

Microvision's flagship products are the projectors produced by Sony (NYSE:SNE) and Celluon, while RoBoHon is a wild card. The products are cool hand-sized projectors that wirelessly interact with phones, tablets and laptops. These are consumer electronics that should sell well during the shopping season (aka Q4). However, Microvision reported disappointing results in Q4, which include a decrease of revenue backlog and minimal sequential growth. Microvision also failed to meet sell-side estimates.

The short case and the outlook of the stock looking forward

In my opinion, the stock has a poor outlook. Microvision is likely to decline in value over time. However, I must be cautious in presenting it as a short opportunity at the current price, particularly after the short interest decreased by 600K shares in the past two months. It seems like the market is recognizing the opportunity to cover.

In my previous evaluation, I factored in some success in the launch of the PicoP technology, which powers the products mentioned above. I estimated that revenues will almost triple and the stock would trade at 2x sales. The current multiple stands at 8x, which is far higher. I don't think Microvision deserves to trade at 8x sales.

However, I still see a world where Microvision powered projectors do become popular. Although that success would not sustain a market valuation of $130 MM, which implies a share price of ~$2.70.

I cease to see Microvision as a short opportunity given that my price target was met. As of now, my view on Microvision is neutral. It's neither a compelling short nor an attractive long.

That being said, I find it appropriate to reiterate that Microvision is a troubled company. Therefore, any capital invested in MVIS is at very high risk of losing principal value.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.

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