This teaser solution first appeared as part of a Friday File that was sent to the Irregulars on January 15, 2016, so it just passed its first birthday… but so many readers are asking about it again now that we’re re-posting it for everyone to read.
What follows has not been updated or revised since then, though the company Jason Stutman calls “the $7 ‘iPhone Killer'” had a good year into the Fall and hit $10 after three good “beat” quarters in a row and analysts raised their estimates for 2017 earnings expectations to 57 cents a share, getting everyone excited… then started to disappoint and received a wave of analyst downgrades and is now expected to earn about 40 cents a share. It’s now down to about $5.50 a share, I have not updated or revised the comments below and have not examined the company more closely in recent months.
The ad from Jason Stutman for the Technology & Opportunity newsletter, and this is the intro that is still catching the attention of Gumshoe readers:
“After years of getting pushed around by Apple, these three technology giants have finally had enough…
“Microsoft, Google, and Facebook have joined forces to create a groundbreaking device that will bring about…
“The Death of the iPhone
Wired magazine says it will ‘change the way we interact with the world,’ and this tiny, $7 tech company is the one thing connecting them all together.”
So that’s our challenge — who is it?
The big picture is, as you might have already guessed, “virtual reality.” That’s the prediction, that this currently “hot” technology of creating an immersive virtual world using headsets and other technology will change the way we do almost everything.
I’m a little nonplussed by how much of a “virtual world” I live in already, sometimes staring at my phone while there are real people around with whom I could be interacting instead, so the idea of all of us wearing augmented or virtual reality headsets and becoming even more depersonalized doesn’t appeal all that much… but there’s certainly a tech consensus that more virtual reality is coming.
And Stutman thinks he’s found the big “hidden” winner of the virtual reality gadget race… more from the ad:
“But here’s the kicker: the little known $7 tech stock that I’ve uncovered has found its way into not one, not two, but all three of the ‘iPhone Killer’ devices currently under development by Microsoft, Google, and Facebook.
“After taking a look inside these three devices, we know one thing for sure: Without this tiny firm’s proprietary computer chips, the ‘iPhone Killer’ wouldn’t even exist.
“Its components have become a necessity, just as Intel’s chips once were to PCs two decades ago.
“In just a moment, I’m going to explain exactly how you can profit up to 6,400% from this $7 ‘iPhone Killer’ stock as these three technology bellwethers attempt to knock Apple off its perch.”
Much of the “story” here is that Microsoft, Google and Facebook, having “lost” the handset war, are doubling down to seize leadership of the next big gadget explosion, and that this will drive mass adoption and get lots of gadgets sold, and this “iPhone Killer” company will benefit.
All three of those companies trade at huge premiums to Apple largely because they’re not gadget makers, so I don’t know that this is a story of three losers trying to catch a winner… but yes, there is a race on to “win” the first stages of mass-market virtual reality or augmented reality devices.
What do we get by way of clues? Well, it’s mostly about the fact that this secret company provides a component that is used in the gadgets being developed by Google, Facebook and Microsoft — here are a few snippets that provide most of the hints:
“… that $7 tech company I’ve been talking about is providing a crucial component for the device: a special kind of computer chip that processes images for the Oculus Rift.
“Better yet, this company has found its way into the devices of two other technology giants determined to kill the iPhone: Microsoft and Google….
“…. this little-known company produces a special kind of display chip, essential for the HoloLens to work.
“And because Apple is being forced to poach Microsoft engineers, you can bet it’ll be following a similar design approach…
“Based on all our internal sources, this tiny company is the only place for Apple’s engineers to turn….
“One of the most telling indicators is that even technology giant Google relies on our $7 tech firm’s one-of-a-kind computer chips.
“Specifically, Google uses the company’s chips in its Google Glass devices.”
Yes, Google Glass was an early “beta” product flop, so far — but it’s not going away… at least not yet, Google is still working on the next iteration, widely expected to be an “Enterprise” version more specifically tailored to work environments. Hololens, if that reference confused you, is the Microsoft “Augmented Reality” goggle device that’s sort of a cross between Google Glass and immersive virtual reality — it’s expected to allow you to navitate 3D imagery while still being able to see the outside world, a bit like a fancy fighter pilot’s visor. That’s a different market, with quite different hardware and software, than the “Virtual Reality” immersive market with devices like the Oculus Rift and competitors, but apparently this company is working on chips for both.
Apple did “poach” a Hololens-focused employee from Microsoft last year and spur more speculation about Apple’s future product plans (though that kind of ‘recruiting’ is endemic to the tech world, so the coverage of this one hire probably says more about our need to grasp at clues than it does anything about the future plans or prospects for two of the largest companies on earth).
And one last bit about Google…
“… while the appearance of Google Glass may have changed, all patents indicate its core components have remained the same.
“Simply put, just as Facebook and Microsoft both rely on our tiny tech firm’s computer chips for their “iPhone Killers” to work, you can expect that Google will, too.”
Hopefully you can see that this is a somewhat tortured logical trail, and requires reading quite a few tea leaves to conclude that these four mega-tech companies all “depend” on this “little $7 company”… even if there is a lot of development going on in this sector, and a lot of hope for a big new market, we haven’t yet seen a mass-production virtual reality or augmented reality device from any of those companies, and virtual and augmented reality will remain a vanishingly small part of those companies’ product lineups for the foreseeable future.
But further cynicism has to wait until we name the actual $7 company being teased — so who is it?
Thinkolator sez this is HiMax Technologies (HIMX)
HiMax does indeed have chips in all of those preliminary VR and augmented reality products — they were in the Oculus Rift developers version and might well be in the consumer version coming out soon; they were in the first version of Google Glass and say they’re still partnering with Google on this project; they say they’re in the Hololens. None of that’s certain until the commercial versions release and there’s a “teardown” by some third party to identify the chips, and even then sometimes the display panels and chips (which is at least part of what’s teased here) sometimes don’t get identified.
Does that mean the stock is going to soar when volume picks up for these kinds of products? There’s some logic to that, in that they would be getting a new commercial-scale revenue stream… but don’t hold your breath about company-changing gains. Most projections are that this VR and AR segment will grow relatively slowly, hitting maybe 5 million units over the next year or so and perhaps 25-30 million annually within five years. From what I can tell, the chips from HiMax that drive graphics (helping to run the LCD screen, etc.) cost a few dollars each. Their chips for microprojection might be more specialized and expensive, that’s what would go into the Hololens and the Google Glass (the actual VR goggles, like the Oculus Rift, use something much more akin to a smartphone screen — it’s the software and lenses that drive the 3D image and feel of immersion), and they do have the potential to place several different chips in each device.
If there’s a total of $10 worth of HiMax chips in each VR or AR device, just to make up a number that’s somewhere in the realm of possibility, and 20 million of them are sold, both of which are probably optimistic 2017-2018 numbers at the earliest, that’s $200 million in revenue. HIMX is a fairly small fabless semiconductor company, and that would make a dent in their income statement — but it wouldn’t transform them into the next Intel overnight.
That kind of thinking requires looking way out into the future (to be fair, much of Stutman’s big numbers in the ad are for five and ten years from now), and making a lot of assumptions about the growth of the market, the anticipated failure of their competitors, and a “survivor bias” look-back at the past so you’re only dreaming about winners like NVIDIA in graphics chips, Intel in processors or Qualcomm in mobile chips and not remembering the many losers and failed or superceded products in those categories over the last 30 years. “Virtual reality will be big” is a consensus thought now, but it doesn’t mean that the winners will be known before mass adoption really catches on… or that the stock will go up without interruption starting now.
Better, I think, to get those “Virtual Reality transforms the world in ten years” thoughts out of your head and consider whether HiMax is getting new business today, and whether it is reasonably valued now and has some possibility of future growth to justify a better valuation over the next year or two. Right now, the business is driven by lower-end smartphones (touch sensors/LCDs) and high-end TVs as the “4K” upgrade cycle helps, they hope, to spur a recovery in large panel LCDs where HiMax has a good driver market share.
So where does HIMX stand in that regard? Well, there’s a pretty good analyst report from Credit Suisse here that gives some reason for optimism… but, again, that’s mostly because of the large panel display market. They give HIMX an $8.40 price target and they see them working their way out of the recent earnings/revenue dip (driven largely by the decline of the 3G phone market in China, where HIMX panels were apparently very popular) and getting back to 2014 numbers by 2017 — that $8.40 target is based on the stock trading at 21X their estimated 2017 earnings.
Which would be decent performance, to be sure — a gain of 20% plus from the current $6.80 or so. Of course, we need to look at these kinds of forecasts with a bit of skepticism — the same analyst at Credit Suisse had an overweight rating and a $15 price target on HIMX two years ago, in March 2014, when the stock was just about to fall off the cliff (it dropped from $14+ in March to $7 by May of that year in part because, in retrospect, they had run up to unsustainable levels due to Google Glass “story” enthusiasm). Back then, they anticipated that HIMX would earn 95 cents per share in 2015 — 2015 numbers aren’t out yet, but for the last four quarters HIMX earned 22 cents and analysts have very low expectations for Q4 (which will probably cut the year’s EPS down to 18-20 cents).
I don’t point that out to criticize Credit Suisse — HIMX has been popular for a while first as a growth name and, over the past year or so, as a possible value name after the drop, and most analysts have been pretty wrong about earnings as far as I can tell during the past two years or so of weaker revenues and shrinking gross margins.
Stutman and Credit Suisse are not the only ones excited about HIMX because of the growth potential in their microdisplay/virtual reality/augmented reality business, Morgan Stanley is also reportedly quite high on the stock following the VR enthusiasm at the Consumer Electronics Show, with a $9.50 target and as much as 18% of HIMX revenue in 2016 coming from augmented reality and virtual reality devices (mostly the former, presumably Google Glass and Hololens).
So there’s reason for optimism, perhaps, but there’s also the reality that a lot is riding on this emerging segment even if it won’t be a huge part of revenues right away — if the products don’t ship in high volume in the next few quarters, or if HIMX doesn’t have as much pricing power as analysts think, the weak margins could continue to pressure the stock unless the (much larger) Chinese LCD business (4K TVs or second tier smartphones) picks up quite strongly.
So far HIMX seems to have a good “design win” record in these emerging augmented reality devices and microdisplay technology (and do try to remind investors of that), but it’s really early days and that’s still probably a competitive segment given its novelty (Kopin is a smaller firm pushing into the area after working on LEDs for camcorders and similar stuff for a long time, there’s a SeekingAlpha writer who argues that KOPN is far ahead of HIMX on microdisplay) but there are undoubtedly others as well), and their other segments have even more competitive pressure possibilities.
Competition is the bedbug of semiconductor stocks — it’s always somewhere nearby, you often don’t think about it until you start itching, and investors often overlook just how much pricing pressure competition puts on suppliers who don’t have a sustainable patent lock on a business or a technological, reliability or brand advantage. As I’ve said before, it must be really tough to be in a business where the expectation is that your product’s performance increases dramatically each year as the cost is cut in half — but fabless semiconductor companies can also, when they have a hit product or a technological advantage, go from producing a million chips to producing 10 million chips and see their margins improve dramatically (fabless means they don’t own the fabrication facility — they just design the chips and sometimes invest in the specific tools and equipment for their chips at the contract manufacturer, which could be Taiwan Semiconductor or any of a few other chip foundries).
You can see the latest investor presentation from HiMax here, based on their third quarter. They will probably report their fourth quarter results, which I assume will be watched very closely (more for forward guidance than for quarterly performance), in about a month — but they did already preannounce, last week, that the results for the fourth quarter were slightly better than they had guided.
I’ve been burned too many times on small chip stocks to wager a guess on HIMX’s future based on just a couple hours of looking through the financials today, and I’m a little skeptical of predictions of huge VR growth in the next six months beyond the first spurt of orders for Oculus Rift from early-adopter gamers… but there is an analyst consensus that HIMX is going to return to growth after what has been a very lackluster year. And they have paid a dividend for several years, so there is some support from that if it continues — it’s paid just once a year, in the Summer, but last year’s payout, if repeated, would give a dividend yield of about 4.5%. The company has been public for almost ten years now, has gone through a few boom and bust cycles like many small chip companies, and is currently still below the $9 IPO price.
The average estimate for 2016 gives us a forward PE of about 30 after most analysts raised their estimates over the past month or two (at least partly because of augmented reality enthusiasm), and those analysts think earnings will grow in the high teens for at least several years. If they’re right, then you can probably consider the valuation reasonable… but it’s all about the future — 2015 has been terrible for the company, and the big turnaround in earnings growth for the next two years is certainly not guaranteed.
HIMX is still pretty expensive based on anticipated earnings, so it’s likely to be volatile around earnings releases as expectations get reset each quarter… any huge surge in the stock seems unlikely to me in the short term, but you never know whether the “story” will light up investors and get them enthused about the Hololens or something else.
So that’s what I’ve got so far… and while I’m tempted to buy lots of stocks these days as prices are falling, HiMax isn’t at the top of my list just yet. What do you think? Ready for a big bet on future augmented reality riches? Have stocks you like more for that story? Let us know with a comment below.