Over the last 6 months the short interest in UNXL has continued to grow each month. The stock has done very well moving from $6 to $41 at it's high. Currently the stock sits around $34. The company has approximately 12 million shares o/s. At the end of April the short interest was 4.1 million shares. The UNXL story is very compelling anda small institutional interest 6 months ago has now grown to 65% at 3/31. Insiders own another 15% of the shares. In total approximately 80% of the shares or 9.6 million shares are owned by holders who will not sell based on scare stories written in Seeking Alpha or in Barron's magazine.
HOW DID THE SHORTS GET IN THIS MESS?
Well you have to go back 6 months to see how this all started. At the beginning of Dec UNXL issued a press release after signing it's first preferred price and capacity partner. For anyone that doesn't understand a preferred price agreement it is something UNXL has been signing that provides guaranteed capacity and a discount to a customer for an up front fee. This fee is used by UNXL to buy the equipment to expand capacity. UNXL signed it's first agreement with an OEM (rumored to be Dell) and the stock proceeded to go on a huge run. At about $15 a share on around Dec 21st CIT/Carclo sued UNXL for breach of contract. The suit appears to be without merit. I won't go into details but you can read about it yourself in other Seeking Alpha articles. The fast move in the stock price combined with the lawsuit created a situation where shorts saw UNXL as a good short candidate.
In December shorts saw a company going on a huge run that had to execute perfectly to maintain the move. They saw a company and management that had not succeeded in the past and without researching the company further they began shorting the stock. The problem is that UNXL has a real product. Uniboss is better and cheaper than the competition. At that point they had no manufacturing. So to continue to move higher UNXL would need to learn to manufacture Uniboss in high volumes using a process never utilized before. Looking back at UNXL there was a lot of risk and the shorts had a good reason to believe UNXL might fail. There biggest problem was that as they were selling shares Institutions were buying. The stock continued to rise.
UNXL has continued to execute perfectly. As it moved higher shorts kept doubling down and currently they have shorted 4.1 million shares hoping the stock will fall into the $20s so they can exit with a smaller loss. It is impossible to determine the true loss the shorts are experiencing but it currently is in the $50-75 million range.
THE SHORT THESIS
We have all read the short comments. They have written it all
1) The company is a fraud.
2) Competition is too tough
3) UNXL can't manufacture Uniboss in high volumes.
4) The product isn't better or cheaper than the competition.
5) The lawsuit is valid and UNXL will lose to CIT
6) The management and company past performace is poor.
7) The company has never made money
8) UNXL won't find find customers for Uniboss
yada yada yada
The problem for shorts is as time as time marches on the company continues to execute and their comments are proven wrong. The company has 2 preferred price and capacity partners, they did a secondary and partnered with Kodak and bought up the first plating line. As the company executes the plan the risk reward grows in the favor of the longs.
WHAT IS HAPPENING WITH UNXL NOW
The company is turning the corner. They have been a development stage company for many years. This is why UNXL was a good short. Many didn't believe they could make the transition form development to manufacturing and sales. But when you develop a better mousetrap it is much easier to sell and manufacture your product.
Uniboss is basically the same thing as other products on the market. A metal mesh sensor that will work better than the current sensors because copper works better than ITO. It is faster, uses less energy, lasts longer and is cheaper than ITO. The only potential downside and one used by the shorts is copper makes the screen look funny. However, UNXL has a step that turns the copper gray and can print the lines so small that the user doesn't know they are there. So that doesn't give them and advantage over other metal mesh companies like ATML. The true advantage vs metal mesh and ITO customers is the manufacturing process. UNXL can make these roll to roll using an additive process. This allows for Uniboss to be produced in 8 steps vs 40 for subtractive processes. This makes Uniboss much cheaper than all the competitors. I would compare Uniboss to buying fuel. Buying oil from different source is all the same. Oil is oil for the most part. But some oil is actually a little better and you pay more for that oil. Uniboss is the same. All touch sensors are basically the same. There are different qualities of each. It just so happens that Uniboss is the best product on the market but you pay less for the best. Sounds like a winner.
Remember this about Uniboss and other metal mesh products. Larger form factors are huge for business. It takes a lot of smartphones to equate to one 23 inch monitor. ITO can't be used in large form factors effectively. Thus we are really competing with other metal mesh providers for this new business. We have an advantage over all these products.
SO HOW ARE THEY DOING SCALING MANUFACTURING
As I stated earlier with the 1st partner they agreed to have the first line up and running in April. The goal has been met. They are now able to deliver more than 60,000 units a month. Currently UNXL is in the process of bringing up 2 additional lines that should be production ready by June. This will increase capacity to 200,000 or more. The Kodak partnership is setting up production in Rochester NY. They will receive 4 additional 100 ft plating lines each month beginning in June that can produce 150,000 - 200,000 units each at full capacity. The first lines will be ready in Sept at the latest and capacity will increase up to 600,000 - 800,000 units each month. Based on these estimates the company could be producing 3 million units a month by year end. When the first 3 plating lines are in and running and the plating lines in Rochester are in place manufacturing concerns should be gone.
Who are we build this capacity for? We know we have one partner. (rumored to be Dell) They will buy up to 1 million units a month by year end. The first product will hit the shelves in Sept. If it works well Dell will take as many units as they can get. Dell will have a price advantage on everyone. We have an ecosystem partner that is introducing us to multiple potential partners. UNXL has said they are working with multiple OEMs on numerous products. Sales will lag production. It has to. You don't promise anything until you know you can deliver. As the year comes to a close sales to Dell and others will be ramping. You can come up with your own estimates but 1 mill units a month will result in $4 a share or more in yearly EPS. That is even with Kodak as a full 50/50 partner.
Dell has received 50 pilot units near the end of April. Dell will now take 4-6 weeks to test these products. When the 50 are approved UNXL will deliver thousands of units for a preproduction run. Then in July UNXL will begin delivering high volumes of Uniboss to Dell for products that will be on the shelves in Aug or Sept for back to school. Our first product in Sept will be a huge accomplishment.
This is very important to remember. Fully diluted shares total approximately 15 million. To make $1 a share UNXL need only sell around $50 million a year. With a Touch sensor market of $15-25 billion in the next few years UNXL only needs a small % of the market to justify the current market cap. With one of the best products and the cheapest you can anticipate the company will sell up to 10% of the market and maybe significantly more.
In 2014 manufacturing and sales will continue to ramp fast. My models have come up with anything from $10 - $15 a share. Assuming the product works UNXL will have an advantage over all the competition. The company has indicated a goal to produce at least 10 million units a month by the end of 2014.
SO WHAT ARE THE SHORTS GOING TO DO?
Based on what is happening in the touch screen market and the progress this company is making the ahh haa moment could happen at any point in the next 6 months. The industry is awarding design wins every day. You know that UNXL won't publicize design wins but the industry knows, and that means wall street will know. As manufacturing and design wins happened demand for the UNXL stock will grow. As I see it Shorts have about 1 month at the most to exit this stock. At that point the company will have 3 print lines up and running and we will be delivering preproduction runs of Uniboss to Dell. So I anticipate the desperate shorts will continue their all out war on UNXL for the next 3-4 weeks and will slowly exit their position. Failure to cover their short position by summer could be catastrophic for those hedge funds. A short squeeze could result in losses of $150-200 mill.
So now is the time to buy if you don't own UNXL. If you own stock it is the time to add more.
Disclosure: I am long UNXL.