Neonode (NEON), a Nasdaq company with a near-monopoly on several touchscreen technologies, developed a pre-iPhone three years before the Apple (AAPL) iPhone and has severely disrupted AAPL's patent case against Samsung. In fact, NEON might now be an acquisition candidate as a result. Additionally, their core business alone, is enough to catapult them to $30 per share.
1) Patents. Apple just shot itself in the foot and all the blood is going to go to Neon. AAPL is suing Samsung because Samsung is using Apple's patents on their swipe technology. Guess what? Samsung is saying "NO" because they are using NEON's patents, which were patented earlier.
I am always on the lookout for strong patent plays. VRNG, for instance, is going to crush Google in its patent for AdWords 4 years before Google started making money off of it. I documented that in this post.
And now I see that Apple wants 2.5% of Samsung's billions in revenues. Well, guess what? Now AAPL might have to pay that to NEON.
Samsung has been holding up NEON's patents as evidence that AAPL did not invent the "slide to unlock" feature.
Don't believe me. Here's the proof. AAPL patented slide-to-unlock in 2009. NEON patented this patent on December 23, 2005 and actually released a phone earlier that year (the first iPhone wasn't released until 2008) that included the swipe-to-unlock. A Dutch judge (where the patent battle is also being held) specifically said NEON had the "prior art" on this, so case closed. NEON first filed the patent in 2002 actually. Here's a WSJ article mentioning NEON's "victory" in the Apple vs Samsung case.
Here is what NEON's patent says: "an active application, function, service or setting is advanced one step by gliding the object along the touch sensitive area from left to right,"
(The NEON nm1, released in 2005. The finger is about to swipe across the screen to unlock the phone, three years before the iphone came out).
The iPhone, iPad, iPod, etc have made over $100 billion in profits since being released. All use the swipe to unlock. This is why AAPL is demanding Samsung fork over 2.5% in profits.
But what if AAPL had to fork over 2.5% in profits to NEON? That's over $2.5 billion. Now, I don't know if NEON is going to sue, but clearly at some point a license has to be worked out, plus a probable settlement for past use. You can't flaunt the law forever.
On this alone I think AAPL could buy NEON for up to 500% of it's current price -- $30.
2) But wait. NEON is not a patent troll. They actually have a legitimate business they have been building on these patents. You get this business for free right now because the #1 above is more than enough to drive NEON to $30.
3) Apple and Samsung are not the only patent war happening in the smartphone business. Google (GOOG) bought Motorola for their patents. To some degree, Google, Apple, and Microsoft (MSFT) are all suing each other over patents related to smart phones. One of these companies is going to have to buy NEON to get a hold of the original patents. Not only did NEON patent the swipe to unlock but they patented many of the touch-sense technologies we use on tablet devices.
4) For instance, when you turn a page on ANY book reader (Amazon Kindle, Sony's (Sony (SNE)) ebook reader, the Barnes & Noble Nook, the Kobo) you are using NEON's patented zForce technology. They have a complete monopoly in the ereader market.
5) Not just for ebooks. Neonode has announced 17 design wins in the past quarter. They have said that each design win is with a tier one company. Given their monopoly in the ereader market it's not unreasonable they can get similar monopolies in one of the sectors mentioned above.
We don't know what those design wins are. A Cowen analyst says that most of the design wins are outside of the ereader segment. So what segments could they be in? Touchscreens are not going away. From NEON's latest 10Q:
" printer products, GPS devices, e-Readers, tablets, touch panels for automobiles, household appliances, mobile phones and games and toys. The development and product release cycle for these products typically takes six to eighteen months."
So if the design wins occurred this quarter, it's quite possible we can see the product being rolled out in the automotive industry (think your dashboard), GPS, household appliances, etc. What happens if one car company uses their technology? Every car company will use their technology. Neonode did not specifically mention any companies, but since they named the sectors of their design wins we can assume at least one+ companies from each sector. Each one of these sectors dwarfs the ereader sector.
6) Fundamentals. Cowen estimates $43mm in revenues next year and 42 cents a share in earnings, tripling earnings. If any of their "design wins" were in the automotive industry those earnings per share will be much higher. Cowen also does not know where the design wins are. They are simply assuming growth in the ereader space. According to the Pew Center, ereaders in the US have gone from 6% of the population in 2010 to 20% in 2012. That means almost 60mm Americans own ereaders and growing. And more to follow in other countries.
Assuming the design wins apply to millions of mobile devices and cars/dashboards, the 2014 numbers can triple again and be over $1.30/ per share in earnings, leading to a conclusion of $30+ for NEON share price.
Often companies are valued at a P/E ratio equivalent to its growth rate. At 43 cents per share that would be a 200% growth year over year in earnings. I don't want to put a 200 multiple on NEON. $80 is a bit ridiculous. But cut that in half. Heck, lets cut it by 90%. That's $8 a share at least just based on the fundamentals and completely ignoring the patent possibilities and the acquisition possibilities.
7) Those fundamentals don't include the design wins turning in to revenues. Cowen specifically mentioned the 43 cents earnings per share BEFORE the company announced their design wins.
And the number does not include the massive upside once Apple or even Samsung (which actually admits to using the NEON patent) start licensing the technology from NEON before lawyers get involved. Also does not include any possible settlements.
A competitive technology can always be developed but NEON has the significant advantage of having patents, clients in every sector, and having been through the multi-year cycles to get these design wins. Additionally Texas Instruments (TXN) puts NEON technology on their chip for mobile devices, cars, etc.
Conclusion: Apple, Microsoft, and Google are in a landgrab for patents. They are also suing each other and others (Samsung, etc) based on these patents. NEON, it turns out, is the patent king in several areas: slide-to-unlock, turning pages, and several other areas (I haven't mentioned the glass that are going on many tablets and dashboards). Amazon (AMZN) and BN (BKS) are clear proof-of-concept that NEON has the best technology for sensitivity to touch screens. Their 17 design wins in other sectors in just the past couple of months in "tier one companies" is further testament.
Just going off their current growth rate and growth of the ereader space but not assuming patent possibilities and their new design wins, Cowen is projecting 43 cents a share for next year.
The stock is at $4.70 right now. I think its a no-brainer buy up until $8-$10 (I own it) and I think it's an acquisition target up to $30. Even at $30 there is significant upside if the patents come fully to life or they reach monopolies in any other sector (mobile phones, cars, etc) as they have in the ereader space.