Too Early To Dub Neonode The 'Apple-Killer'

| About: Neonode, Inc. (NEON)

Anyone thinking about investing in Neonode (NASDAQ:NEON) because of earlier claims that the company patented "swipe-to-unlock" several years before the Apple's (NASDAQ:AAPL) iPhone was released should first take a closer look at the actual patent in question. Earlier analysis claimed:

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. ...

On this alone I think AAPL could buy NEON for up to 500% of it's current price -- $30.

Based on this, many likely believed that NEON's patent, USP 8,095,879, represents a proverbial magical beanstalk bean, leading investors to capture the goose that lays the golden apples. However, an analysis of the patent shows that such claims are, at best, premature, and potentially off the mark entirely. Simply put, Apple's own "slide-to-unlock" process is not only distinct from NEON's "swipe-to-unlock" patent, but in fact is almost the exact opposite. NEON presently has no viable patent claim against Apple's "slide-to-unlock" process, and any present reliance on a potential multi-billion dollar liability from Apple is severely misplaced.

Note that NEON's head of IP announced intentions to contact Apple about licensing its 'swipe-to-unlock' patents back in February. After several months, the company reported no further licensing activity. While Apple may ultimately end up licensing, or even acquiring NEON (or just its IP), it would only do so to the extent necessary to mitigate what are presently very illusory risks.

NEON's patent does indeed describe a user interface for a mobile device using the combination of "an object" (such as a finger) touching a "representation of a function" (in other words, an icon) and then "gliding along the touch sensitive area" to activate the function. What's more, the phone released by NEON used a swipe-to-unlock motion as part of its UI. Unfortunately, that is where the similarities with Apple end.

The scope of the '879 patent, like all patents, is defined by its claims. Unless a company's product includes each and every element of at least one claim, NEON remains powerless to demand compensation. The broadest claim of NEON's '879 patent requires:

[A] user interface comprising:

a touch sensitive area in which a representation of a function is provided, wherein ... the function is activated by a multi-step operation comprising (i) an object touching the touch sensitive area at a location where the representation is provided and then (ii) the object gliding along the touch sensitive area away from the touched location, wherein the representation of the function is not relocated or duplicated during the gliding.

The italicized portion at the end of NEON's patent claim was added by the US Patent Office at the very last instant, after more than 10 years of legal wrangling over the merits of the underlying patent application. As a practical matter, the last minute change grossly altered NEON's potential patent enforcement prospects. Observe any iPhone "slide-to-unlock" process and you should notice how the "representation [arrow icon] of a function [unlocking the phone]" is actually relocated as your finger glides along the touchscreen. In fact, Apple's own "slide-to-unlock" patent (USP 7,657,849) claims almost the polar opposite process from NEON's '879. The AAPL '849 patented process includes "detecting contact with the touch-sensitive display [and] ... moving an unlock image along a predefined displayed path on the touch-sensitive display in accordance with the contact."

Because Apple's "representation" of the unlock function is relocated during the gliding, no credible argument (short of rewriting the laws of physics) exists to explain why Apple would be infringing NEON's '879 patent. Unfortunately, patents only have value to the extent they cover technologies that are actually used. Without a credible claim for patent royalties, NEON's patent serves no practical purpose from a valuation perspective.

NEON did do one smart thing for stakeholders hoping to ride the patent-Applesauce train. Actually, make that 14 smart things. The company filed no fewer than 14 additional applications that claim to be entitled to the same 2002 filing date as their '879 patent. NEON could use any one of those applications to argue for a broader claim, eliminating that "not relocated or duplicated" clause. This future contingency might have some present value, but far from $30 / share.

Further, such contingencies are a long ways off. To date, only one of NEON's 14 additional applications has even been examined, and the patent office so far refused to indicate any allowable claims.

Finally, it is important to note that other aspects of NEON's business may be promising, if not $30 / share promising. The analysis liked above mentions that:

Neonode has announced 17 design wins in the past quarter. They have said that each design win is with a tier one company.

[and] ...

Cowen estimates $43mm in revenues next year and 42 cents a share in earnings, tripling earnings.

Further, an analyst report by Crystal Research, "The global touchscreen market was estimated at $13.4 billion in 2011, forecast to reach nearly $24 billion by 2017. Within this arena, Neonode estimates that it holds approximately 80% of the market for touchscreen interfaces in black-and-white eReaders--a sector expected to ship between 34 million and 38 million units during 2012." Companies like (NASDAQ:AMZN), Sony (NYSE:SNE) and Barnes & Noble (NYSE:BKS) have already licensed the touchscreen technology (an optical technology distinct from Apple's touchscreens and the 'swipe-to-unlock' patent). If the projections hold true, NEON may ultimately become successful, despite operating at a net loss to date, including a $1.5 M net loss through the first quarter of 2012.

Betting on the company's patent portfolio alone, however, represents a significant gamble at the moment.

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