NEON - Neonode: Sophisticated Technology Weak Business

2023-04-05 04:49:46 ET

Summary

• Neonode has spent the past decade losing money both in terms of income and cash flow.
• It is a small firm that has gotten smaller, with only 45 employees as of its recent filing.
• Financial metrics have continued to trend downwards and the valuation is sky-high.
• The only reason I'm not calling this one a sell is because of the intellectual property portfolio; it is possible that some kind of event catalyzes this into real value at some point.
• Nonetheless, there have been no signs of that happening yet - and investors should avoid the stock for the time being.

Overview

Neonode Inc. ( NEON ) is a microcap technology company that primarily sells two products, one of them hardware and the other software. The first of these is an optical sensing technology for consumer devices called zForce. zForce takes the form of a touch-free screen for the devices that it is integrated into. It is currently deployed across medical, automotive, and consumer verticals.

The software side of the house here is called MultiSensing. MultiSensing is a set of algorithms for machine perception and image processing. Essentially this allows computers to process what is going on in a streaming video context. A use case cited by the company is determining whether a vehicle is occupied or not through a video feed, although there are certainly many others.

Off the bat we can see that this is a unique technology company that has a track record of innovation. I haven't yet encountered another entity selling this particular mix of products, and am not familiar with another company that is able to offer touch-free touchscreens. The firm states that it has over 100 patents and is deployed across more than 85M devices globally. They also operate across multiple verticals, as would be expected of a company selling what is a relatively foundational technology such as this one. While the technology here is certainly intriguing, it's really the financials that count for us investors - this is what we'll review in this article.

Financials

Neonode isn't too hot when it comes to revenues. Over the past decade, they have not been able to establish a consistent baseline to earnings. While reaching $11.1M for fiscal year 2015, the firm subsequently saw its revenues decline every year since. This is a poor showing.

Net income doesn't look much better; Neonode has not been profitable for a single year of the last 10. While the loss may have shrunk somewhat, do remember that revenues have as well throughout this period.

Having seen the profitability picture, we can look to the balance sheet. Here things are not too worrisome. The company has only $259K of total debt and has consistently maintained more assets than liabilities. It also has a nicely positive book value per share, although this number is not an overly large portion of its share price at 19.3%. The employee line item shows us how miniscule this company really is: it only has 45 full-time employees. Frankly I find it impressive that they were able to develop such sophisticated technology with such a small workforce. It is also evident, however, that they are sorely lacking on the business front and have not been able to achieve growth.

This company also consistently loses cash. Just like net income, it has consistently done so every year for the past decade. This is the nail in the coffin for the financial picture around this stock.

Along with these flailing financials, Neonode is trading at a very expensive valuation relative to its revenues as well as its book price.

There doesn't seem to be a reason to purchase this stock. The only potential long-term bright spot that I can garner is that the firm appointed a new CEO in 2020 . It's possible that he may steer the ship into new waters, although I sure haven't seen any evidence of that yet.

Conclusion

Neonode is an example of a company with cutting-edge technology that just doesn't do a good job of selling it. This may be common in Silicon Valley, but I believe us public market investors have a higher bar for business performance. While I think their intellectual property and R&D capability have real value, the firm hasn't done a good job of bringing it to market. The new CEO has also not demonstrated the capacity to do that as of just yet. It doesn't quite make sense to me why this company trades at the multiples that it does, and I won't speculate as to the case. Nonetheless I want to make it clear that investors should not purchase this stock at this time.

While I would normally call a hard sell rating on a stock with these kinds of financials over such a long timeframe, I will hold off here. This is due to the evidently advanced technology and quality intellectual property that they have; I also believe their optical sensing technology has a very large addressable market that will continue to be buoyant. Post-pandemic we have only more demand for touch-free computer/human interaction. If this firm can one day harness its intellectual property into business results, things can get interesting. Perhaps a private equity firm will even take it private and shake things up, but I wouldn't hold my breath. Barring an eventuality of that nature I wouldn't buy this stock. It's a hold at best.

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