Kopin Q2: Mr. Market Still Doesn’t Get It.

Aug 05

Kopin Q2: Mr. Market Still Doesn’t Get It.
On Tuesday August 2nd, Kopin (KOPN, NASDAQ) released its Q2 operating results and a business update.  The stock dropped 15% on the news. Revenues were disappointing, to say the least – just $4.4 million vs. $10.9 million in the prior year.
I’m betting Q2 or Q3 (coming next) will prove to be Kopin’s worst quarters for the next decade.
Why so confident?…

Declining sales are almost always a bad thing, unless the company has a good excuse. For instance, one of my earlier investments in life was a company called Advanced Battery. I won’t go into all the details, but it traded down significantly because of a few bad sales numbers.
However, after digging into the story a bit, it became clear Advanced Battery’s sales weren’t down because no one wanted its batteries.  Sales were down temporarily because it was relocating to a larger manufacturing facility, gearing up for an increase in demand. By reading the 10K filings I also determined Advanced Battery was on a hiring spree.
The speculation worked out well.
While the vast majority of analysts would never stick their neck out for a company like Kopin, I will. In my view KOPN is a steal in the low $2′s. It has roughly $1.55 per share worth of cash, and no long-term debt. Today Mr. Market thinks KOPN is a value stock, merely milking what’s left of its outdated technology products. When in fact, KOPN will become a growth story by year’s end with momentum building into 2017.
Bottom line, not unlike my Advanced Battery example, Kopin’s sales are declining for a good reason – it sold legacy business units to focus on “wearable technology”, arguably the next big thing. Thus, sales have declined.

Where will the growth come from?…

Kopin’s “Solos” smart eyewear is on track to begin commercial shipping this October.
Kopin developed Solos in coordination with the U.S. Olympic cycling team. Within 24 hours Solos reached its funding goal on KickStarter. This validated the concept and Kopin got valuable consumer feedback. Kopin’s innovative and patented Pupil™ Optics have the unique performance feature of a sunlight readable, transparent image in a tiny and energy efficient form factor, which is perfect for Mobile Augmented Reality (AR) headsets.
Serious cyclists from across the world will buy Solos for $400-$500 MSRP this October. I estimate the “serious cyclist” market to be approximately 5 million people worldwide.  Assuming 2% of them buy a pair of Solos, this would result in roughly $50 million sales for Kopin (almost no one is expecting that). Many people on KickStarter also asked if Solos could be useful for “runners” (the answer was yes). While its target niche is cyclists, serious runners would expand the market size for Solos dramatically.
Kopin’s Whisper™ Technology is based on Artificial Intelligence. It identifies and differentiates voice and noise in the acoustic environment using neural network processing. It is not a traditional noise cancellation approach. For years, Kopin has stressed “voice will be the next touch” (and it will be upon achieving 99% accuracy).
KOPN - whisper chip
The technology has been used in industrial and military headsets for several years, and now Kopin has incorporated the Whisper Technology into a Whisper Chip for commercialization in consumer applications.
The market size for Whisper Chip is immense, we’re talking tens of millions of units (think smartphones, watches, sunglasses). Depending on the volume purchased, Kopin could be generating $5 to $10 per chip.
Is Kopin’s growth potential not obvious?…

Kopin is a player in every aspect of wearable/hands-free technology – micro displays, micro batteries, and voice control. Over 300 patents have been issued to date, most of which are related to wearable technology.
KOPN - wearables
Today an investor is paying just $30 million (after backing out the cash) for Kopin’s growth potential and deep intellectual property portfolio.
That’s a great price to pay, if you ask me.

 

*Daniel has a long position in KOPN

 

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