eMagin: Imagine This Stock Collapsing Below $1

by Sonya Colberg, Senior Editor - 6/11/2015 9:51:11 AM

Looking for all the world like a virtual reality gamer, eMagin Corp. (EMAN) has been virtually running in place ever since the introduction of its first microdisplay 14 long years ago.

And now one of the OLED (organic light emitting diode) display maker’s greatest rivals has reached across and hit eMagin’s reverse button … stealing a Navy contract right out from under its nose.

This – and additional adversity – will likely squash the almost flat revenue anticipated for 2015. Though EMAN just turned a slight profit after seven straight quarters of losses, these challenges suggest it may have a tough time hanging onto that oh-so-tenuous profitability.

Investors may check out other viewpoints here, which include bullish points such as EMAN will gain government contracts, improve compared to rivals and find growth opportunities. The company has not responded to TheStreetSweeper's request for comment.

Meanwhile, we’ll hit the top reasons EMAN’s virtual shoot-out will likely end badly. We’re looking for the stock price to drop below $1 because:

*1. Yowza! Trading At 100 Times Earnings?!?

The most bullish analyst estimates EMAN’s earnings will reach 3 cents per share for the year. So that means investors are paying an astronomical 100 times more than the earnings they expect to receive.  

That’s a lot considering the fact that EMAN is a little OLED microdisplay maker with declining revenue - not one of the highflying biotechs working on a cure for cancer.

We’ll save the multiple we’re generously projecting for EMAN for the conclusion of this article.

*2. Ouch! EMAN’s Little Rival Nabs Military Contract

One of EMAN’s greatest rivals, Massachusetts-based Kopin Corp., just pulled off a stunning upset. The rival announced a US Navy production order for its high-brightness color SXGA displays for full-color helmet-mounted display products for MH-60 helicopters.

Kopin stated its SXGA color display is the first microdisplay allowing full-color advantages in aviation helmet-mounted displays. Lack of full color is a distinct disadvantage with EMAN’s prototype, though EMAN plans to add blue soon, according to this Upload article.

Military customers are vital to EMAN, of course. Hopewell Junction, NY-based EMAN has won several Army and Navy microdisplay agreements, though most have been completed in the last couple of years. One $6.3 million deal reached in 2014 remains alive but will die out completely in 2016.

EMAN certainly cannot afford to lose a single contract.

*3. Contract Problems Began Earlier

The Kopin deal may or may not be tied to EMAN’s earlier customer problems.

Three customers stopped shipments last year due to an apparent wire bonding problem in EMAN microdisplays. Two clients resumed shipments but the third customer is now “not interested,” according to EMAN.

EMAN has been trying to meet that customer’s requirements. But, let’s face it, it doesn’t sound promising. See the filing note on page 45 here, especially noting the last line:

“It is reasonably possible that eMagin will incur a future loss once the terms of the proposal are finalized.”

EMAN is learning the priceless lesson that one disappointed customer can sucker-punch a company and leave it reeling for a long, long time.

*4. Real, Robust Rivals

Kopin is just one of numerous large and small companies, nipping and thrashing away at the very same market opportunities pursued by EMAN. Here’s EMAN’s link mentioning the “highly competitive” industry packed with rivals such as:

*Yunnan OLiGHTECK Opto-Electronic Technology Co. (Olightek) in China and MicroOLED in France, the Sony division in Japan and Himax Technologies (HIMX in Twaiwan.

* New York-based Vuzix Corp. (VUZI) and private, San Francisco-based Osterhout Design Group.

Quickly comparing EMAN with a couple of competitors shows the company has performed worse than Kopin in half of the metrics and nearly as poorly in the other half … and worse than Himax in all metrics:

(Source: Yahoo Finance)

*5. Reality of EMAN’s Virtual Reality: A Mixed Bag

CEO Andrew Sculley recently commented about potential partners' or customers' positive reactions to EMAN's headset prototype as the company tries to attract a manufacturer to produce a consumer product. But the prototype may not be hitting all the right buttons for everyone.

Recent reviews during the Consumer Electronics Show by Virtual Reality Reporter indicate the Osterhout Group’s screen resolution, user-interface and overall experience vaulted that new release into preferred status, though tempered by price concerns.

Reviewers also indicate Oculus Crescent Bay impressed with its display resolution and immersive experience. They also liked Samsung Gear VR and the affordable $99 Google Tech – Go4d for use on all smart phones.

While EMAN’s most recent prototype apparently wasn’t shown at this year’s Consumer Electronics Show, investors can see that EMAN rivals have acquired a certain status.

The author of a June 9 Upload article tried and liked eMagin’s newest prototype but noted some distinct negatives. Along with the currently missing blue LED, eMagin’s display cords would fall out unless eMagin’s Dan Cui held them in place when the reviewer moved his head. Also, the headset’s headtracking was not ideal, though Mr. Cui said an add-on could produce positional tracking that could improve gamers’ experience.

A Seeking Alpha author also offers a nice comparison of the head-worn-wearable components of EMAN and several other companies, here, suggesting EMAN offers nothing extraordinary.  

*6. Institutional Investors Bow Out

Uh-oh, institutional investors appear to be discovering EMAN’s negatives, too. It’s always a good idea for average investors to be on the alert if more institutional holders are selling a stock than buying it.

That’s exactly what is happening to EMAN:

(Source: Nasdaq)

Institutional holders that dumped their EMAN shares as of March 31 include Robert W. Baird & Co. and Deutsche Bank.

Altogether, 16 institutions unloaded some or all of their holdings for a total of 100,873 shares sold, pretty close to double the number going the opposite direction.

Not a good sign. And that unfortunate selling trend may link to more unsettling reality … revenue slips.

*7. Slipping Revenue: Putting Income In Perspective

After almost two years of operating losses, EMAN last quarter reported income of $320,000.  That’s great. But before we start imagining piles of pennies in EMAN’s future, let’s take off our virtual reality headsets and grab a dose of actual reality.

Pushing through the Securities and Exchange Commission filings, investors can see revenue is actually slipping. Down, down, down, down. Accumulated losses are going up, up, up, up … to $207 million.

Check out last quarter revenue versus the same time a year ago, below:

And revenue dropped by over $2.2 million in 2014 versus 2013, almost as much as the $2.6 million drop from the year before:

 (Sources: SEC filings, here, here)

While we applaud EMAN for cutting enough costs to help it lightly step into net income last quarter, companies cannot just cut their way into long-term profitability. They have to do just the opposite of what EMAN has done lately … groooow revenue.

*8. More Reality: Unsustainable Upward Trend

Over the last four months, EMAN appears to have been extremely overbought, reaching an unsustainable excessive uptrend that occurs only 5 percent of the time. So, according to Nasdaq, investors can expect the stock to turn sideways or drop.

*Conclusion:

Not so long ago, a company like this had to be consistently making money to be trading at a multiple of 12 to 15 times earnings. Yet EMAN investors are paying just about 100 times earnings.

Considering all the challenges facing the company, we can bring ourselves to give EMAN only a factor of 25 times the most bullish projected earnings – still incredibly generous.

So, as soon as investors push off their clunky virtual reality headsets, we imagine shares will get shot down to ~$0.75 per share. 

* Important Disclosure: The owners of TheStreetSweeper hold a short position in EMAN and stand to profit on any future declines in the stock price. 

Editor's Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to editor@thestreetsweeper.org or scolberg@thestreetsweeper.org.

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