“We’re facing a $ 32 billion market opportunity.” In late February, investors were greeted with that message as Uni-Pixel (NASDAQ: UNXL) interim co-CEO Carl Yankowski kicked off the quarterly conference call. Actually, that massive dollar amount gets a mention on almost every one of the company’s conference calls. And analysts, along with a pack of bullish investors, have been fixated on that figure for quite a while.
The company’s alternative touch-screen technology aims to replace the current indium tin oxide (ITO) formulation that is found on many of today’s smartphones and tablets.
When I first looked at this stock in June, for our sister site, StreetAuthority.com, shares had already plunged from $ 37 to $ 15. As I noted back then, “Management’s repeated citation of a $ 32 billion potential market opportunity in 2018 is nothing short of reckless.” Naive analysts, following management’s guidance, published reports predicting $ 100 million in annual sales in 2014, and much higher sales in subsequent years.
These same analysts are still creating unrealistic expectations. Though they concede that the company has yet to get the ball rolling in terms of sales, they still suggest it will generate more than $ 45 million in sales by next year.
As I said when I reviewed the stock again in November, “Indeed, one solid quarter of production and product revenue recognition would go a long way to silence the short sellers in this controversial stock.”
Yet, UNXL appears no closer to gaining sales traction. And unless sales start ramping up soon, this stock, which has already lost half of its value since last June, has up to 100% downside from here.
On the February conference call, investors were treated to more of the same. In the fourth quarter of 2013, UNXL posted just $ 11,000 in sales. Meanwhile, quarterly losses now surpass $ 6 million, more than double the burn rate seen a year earlier. A well-timed capital raise in 2013 means there is still $ 39 million in the bank, but that cash balance may not be as robust as it appears.
That’s because three separate law firms have announced ongoing investigations into UNXL’s various claims. In light of the company’s litany of unfulfilled promises, it may be on the hook for some pretty hefty legal fees and settlements.
It’s not just private law firms that are making trouble. As I noted back in November, the SEC is looking into the company, presumably involving statements made to investors regarding sales projections and the company’s underlying technology. When UNXL raised capital in the spring of 2013, management almost surely made a series of bold claims, and the SEC is likely interviewing investment firms that bought into the deal on such promises.
According to Chief Technology Officer Bob Petcavich, the company’s technology has been experiencing a set of teething problems on the path from engineering to production. In recent quarters, blame has gone to initially poor manufacturing yields, then to faulty substrates, then to improperly aligned bezels. As Roseanne Roseannadanna once said, “If it ain’t one thing, it’s another.”
When pressed during the Q&A to clarify UNXL’s problems management was predictably evasive, punting the most important questions.
Petcavich did say, “Our ongoing efforts in solving technical issues as they have developed supports our outlook for our commercial manufacturing timeline.” Huh?
This is a timeline that has always been just a few quarters away. Management finally stopped suggesting that production and sales will finally take off in a quarter or two, and instead now says that it hopes to achieve “certain progress milestones in the second quarter.” Investors shouldn’t get their hopes up, though, as it’s likely to be more of the same in the near term.
With mounting lawsuits, the SEC conducting its own investigation, and still-unresolved questions about whether the technology will ever actually generate sales, investors should understand that shares could potentially go to zero.
Some investors likely hope that UNXL can at least salvage the value of its technology development, including a handful of patents. But in light of its inability to actually produce anything, it’s unclear that any sort of value even exists for its technology.
I see shares headed down to $ 3.50 in the next six months, which represents 54% downside from current levels.
Recommended Trade Setup:
–Short UNXL above $ 5
– Set stop-loss 15% above entry price
– Set initial price target at $ 3.50 for a potential 30% gain in six months