EMAN - eMagin Corp.: 2023 Is A Pivotal Year For The Growth Story

2023-04-05 16:54:24 ET

Summary

• EMAN reported 2022 results, highlighted by strong sales of its OLED microdisplays for the defense sector and medical devices applications.
• The company's direct patterning technology meets the requirements for the next generation of augmented and virtual reality products.
• An expectation for accelerating demand from consumer applications over the next several years supports a positive outlook for the stock.

eMagin Corp. ( EMAN ) is recognized as a leader in high-resolution active matrix OLED microdisplays. These are the specialized panels incorporated into near-eye imaging products like aviation helmets, medical devices, and a growing number of consumer electronics.

While shares of the stock have had a volatile history, EMAN popped on our radar with an impressive rally, surging more than 150% in 2023 thus far. The momentum follows a solid financial performance in 2022, highlighted by climbing sales and a turn to positive adjusted EBITDA.

The attraction here is the company's proprietary "direct patterning" technology that satisfies the ultrabright requirements for next-generation augmented and virtual reality (AR/VR). This is a market expected to accelerate based on opportunities with the metaverse and the proliferation of AI. In our view, eMagin is well-positioned to capture these tailwinds supporting a positive outlook. The stock is speculative but is worth a spot on our radar.

EMAN's Financials Recap

EMAN reported its Q4 results on March 9th with a positive EPS of $0.01 representing $808,000 in net income. Sales of $8.41 million during the quarter climbed by 17% year-over-year. For the full year, sales increased to $30.5 million from $26.0 million in 2021. The trend was strong enough for full-year adjusted EBITDA to reach $2.2 million, reversing a negative $4.1 million in the prior year.

Management is citing "robust shipments" of displays used in night vision goggles and thermal displays for weapons sights as a supplier for the U.S. Department of Defense. Applications for medical devices have also been a growth driver.

For context, approximately 75% of revenues are generated from the defense industry customers, followed by 13% on the industrial and medical side. That relationship with its military customers includes several different procurement contracts and grant awards. In Q4, eMagin received a $1.7 million order for the display system utilized in the F-35 fighter jet.

The company ended the year with $4.3 million in cash against $1 million in financial debt. Note that the company raised $5.8 million in net proceeds from share sales over the past year from an active at-the-market program.

What's Next for EMAN?

In many ways, military applications serve as the testing ground for cutting-edge technology that eventually can roll out into consumer products. The idea here is that eMagin's Direct Patterning full-color microdisplays represent a breakthrough capable of projecting 10,000cd/m2 as a peak luminance benchmark.

A higher brightness allows for more realistic displays, making the technology viable, particularly in devices that need to be operated outside in bright daylight. eMagin has confirmed it is working with a "tier-one consumer company" to develop this technology and potentially manufacture a product at a commercial scale.

From there, the question is if and when a consumer product will "take off" as the next must-have electronic. AR/VR are hardly new concepts, but the sense is that the technology is finally advancing to the point where it can cross over from being just a niche product to more mainstream appeal.

According to the industry group, Display Supply Chain Consultants (DSCC), the AR/VR market is expected to grow by an average of 52% annually through 2027 and reach $7.2 billion, from just $587 million in 2021. The potential that eMagin can capture just a slice of this growing market with its high-end and full-color OLED solutions is part of the bullish case for the stock.

While we don't have any specific financial targets from eMagin or any indications of that explosive growth on the consumer side of the business, the good news is that the core segments serving defense and aerospace customers along with the medical applications appear strong.

Considering EMAN's current market cap sitting right around $200 million, the stock is trading at a sales multiple of around 6.5x. We believe that to be an otherwise reasonable level for a company that generated a positive adjusted EBITDA margin of 7% for 2022 with 17% top-line growth. With a net cash balance sheet position and the optimism by management projected during the earnings conference call , we can say that EMAN is in a better spot compared to many other companies trading at an even higher sales premium.

EMAN's Stock Price Forecast

There's a lot to like about EMAN, but we're not ready to make a hero buy call at this time. With shares rallying nearly 100% just in the past month, the baseline is for wide swings of volatility. We rate EMAN as a hold, representing a "neutral" view over the near term, although we wouldn't be surprised if it's trading higher over the next year.

The way we see it, EMAN is still a "show me" story and the company needs to prove it can consistently generate positive cash flow and higher earnings with some stronger growth momentum, sooner rather than later. By this measure, 2023 will be a pivot year to confirm the improving financial backdrop that was "on display" this last Q4.

Updates regarding new commercial opportunities on the consumer side coupled with positive financial guidance from management will be important for shares to sustain a rally. In terms of risks, setbacks on the defense and medical applications side of the business, with weaker-than-expected sales, would open the door for a deeper selloff lower.

For further details see: