The ad we’re looking at today is, of course, a pitch for solar power and for some specific solar technology companies… but we don’t get that info up front. If you look at the transcript of the pitch for Nick Hodge’s Early Advantage newsletter ($799/yr), they don’t “let the cat out of the bag” that it’s actually solar power they’re talking about until page 18. Out of 45 pages.
It’s true, I love you — why else would I sit through all this hyperbole? 45 pages doesn’t make Hodge the worst offender, to be sure, but that’s a lot of building scenarios and spinning tales.
So… shall we find out what these stocks are for you? He teases two, both of them quite small… and this time there’s no overlap with the “Endless Free Power” pitches from Dr. Kent Moors that are still flooding many of your inboxes and driving a lot of questions our way — Moors was pitching SUNE as his favorite and, secondarily, TSLA and WNDW… Hodge’s colleague Jeff Siegel did tout SolarWindow (WNDW) years ago, when it was still called New Energy Technologies, but it’s not in this current ad.
At least one of the stocks is a “rerun”, though — so there’s your hint from me.
Here’s how Hodge gets us interested, after we skip through the first dozen pages of “New Texas Oil” foofaraw:
“… 2016 is The Last Year This Tiny $1 Stock Trades UNDER $10….
“My point is, 2016 is the “tipping point” for the solar market’s energy dominance.
“And that’s exactly when this company’s new technologies will hit the market… dropping the price of solar by 75%.
“Sure, tons of new solar technologies are being mentioned in the news. But few are even close to ready for market. Most have not even left the prototype stage.
“That’s not the case at all with this company’s third-generation solar cell — which is not only ready for production…
“But has proven commercially viable in assembly line tests.”
Sounds impressive, right? Then he goes into the rational-sounding math behind his projections of massive gains:
“How much money are we talking about?
“In the United States alone, the market is $33 billion.
“So let’s be conservative and say this company’s solar technology captures just half of current U.S. sales…
“That’s nearly $16.5 billion in annual revenue.
“Twenty percent of that — this company’s share of royalties — is roughly $3 billion.
“Factoring in the average price-to-sales ratio for similar companies, the share price comes out to $67.
“That’s a 13,400% gain!”
That’s hooey. I’d use stronger language, but Stock Gumshoe is a family operation.
Why? Because this time he’s hinting at a company called Natcore (NXT.V in Canada, NTCXF on the OTCQB in the US)… which, sort of like SolarWindow, has been a solar technology/materials R&D company in search of a viable product for a long time. Nick Hodge also indicated that the stock was on the verge of popping from $1 to $21 back in 2012 when he hinted that this was the “non solar stock to save the solar industry.”
This company was teased by them in a slightly different way just last Fall, too. The company has been public, and tiny, for about 6-1/2 years, and right now it’s about at the lowest price it has traded at since the IPO — at least in US terms, which is what we should pay attention to since it’s not a Canadian business even though their primary listing is in Canada (the only reason for the Canadian listing is that they were too small to list on AMEX back in 2009, and they still are, though they upgraded their US listing to the OTCQB last year and are filing with the SEC… I haven’t seen a quarterly report yet in their US filings).
Promotional chatter about them from Nick Hodge and from other newsletters and pundits and promoters has helped to bring price spikes in the past, particularly when the company has gotten the attention of national news outlets or been singled out by the government, and announcements about R&D accomplishments and possible commercialization have also had a positive impact on the price, but it has always come back down after the attention waned.
Will that happen again this time (either the spike, or the waning)? I have no idea, but I’d urge you to be skeptical about the timing of commercialization for their technology. I don’t know whether we should consider this a “when” or an “if” issue, since I’m certainly not an expert in materials science or in the solar cell or semiconductor industry, but even if you’re optimistic and consider their commercialization to be a “when” question, that date will almost certainly be long after this year. They’ve been saying “this year” or “next year” for a long, long time.
The technology the company was founded on was liquid phase deposition, which is a cheaper and safer way to create panels (instead of gas/vapor deposition), and the two solar cell improvements they’re currently trying to sell are an “absolute black” coating that cuts reflection and reduces costs, and a laser-etching back-contact HIT technology that can cut costs by skipping a manufacturing step or two and also improves efficiency.
And the reason I was tempted to go beyond saying just “hooey” is that while these are technologies on which Natcore hopes to receive royalties (that would have to be preceded by a deal to actually commercialize them, of course, which hasn’t happened), but the royalties, even if they have the good fortune to reach that point, will not be gross sales royalties. Not even close, that would presumably be a complete non-starter for a very cost-sensitive industry. The royalties discussed in their latest president’s message are royalties on the gains that Natcore’s technology can generate. CEO/President Chuck Prozini indicated that 10-20% would be the range of royalties they expect, so that would be, say, 10% of the cost savings that their customers get from using the “absolute black” silicon coating, or 10% of the efficiency gains reached by using the back-contact HIT-type cell design.
Which could still be a big number, of course, IF commercialized on a large scale. Reaching half the U.S. solar market is not a conservative estimate in my opinion, that’s probably an insanely optimistic estimate, so that broad number from Hodge is silly too… but if Natcore could reach, say, 3% of the market, and they end up cutting costs for those customers by 3% and therefore generating a 10% royalty on that 3% savings that would still be a big number for a little company like this. Margins are tight in solar, but if we assumed it was a higher-margin manufacturer like First Solar (FSLR), where cost of goods is about 60% of sales, then that would mean that cutting costs by 3% would mean that margins improve by a little less than two basis points (gross margin goes from about 40% to 42%, roughly speaking).
That’s essentially saying that the benefit that First Solar garners is roughly a 2% cost savings, so if Natcore gets a 10% royalty on that savings you’re looking at effectively something like a 0.2% sales royalty to Natcore. With First Solar having about $3.6 billion in sales over the last year, that would mean the royalty to Natcore would be $7 million (.02% of $3.6 billion). That would be a lot for Natcore, to be sure, since they’ve never posted any meaningful revenue, but even that pretty huge level of commercial sales would really just make this a reasonably valued company right now if you didn’t presume great growth or scalability — they lose about $5 million a year, so if such a deal came without increased costs it might mean they earn $2 million a year in profit on the royalty… which is enough to move the needle for a $20 million company, but maybe not an earthshaking windfall.
This is all just an example and a mental exercise, I remind you, as far as I know those companies have no such relationship and Natcore has never announced an agreement that’s gone as far as actually stating a royalty level — and I think, personally, that the idea of Natcore getting their technology adopted by a major manufacturer and having it applied to all of that manufacturer’s sales is a large leap and that relationship, even if it might someday be possible (I have no idea on the odds, to be clear), would probably take a long time to mature. I’d consider those numbers to be wildly optimistic, but that might just be because I’m a little extra-skeptical after seeing Natcore teased for so many years.
Is that kind of potential big enough to take the chance that they won’t ever commercialize one of their core technologies? Am I being too cautious and skeptical? Well, that’s your call — all I know is that this is a small and promotional company that has to raise a few million dollars every year to keep the lights on, and the commercialization process is apparently long and difficult, particularly because all the big manufacturers (SunPower, Panasonic, et al) are also developing their own new technologies all the time. And the chatter about their designs and technology being more efficient and critical to the next phase of development is quite similar to the chatter that was floating around about this same company back in 2009… I suspect that it’s a lot easier to sell the story to investors than it is to sell Natcore’s technology to solar cell manufacturers.
The other stock that Hodge touts is made to sound similarly exciting, here’s the tease:
“Solar Boom Play #2: Bag 100-Fold Gains on Solar Picks & Shovels
“The next way to play the solar boom is also not really a solar company. It’s never touched a solar cell.
“Instead it produces software that brings standardized quality to solar manufacturing.
“What I consider a ‘picks and shovels’ play for the solar boom.”
“Picks and shovels” is a nice idea, of course — that’s an allusion to the fact that the folks who made money in the California gold rush were the entrepreneurs who sold picks and shovels (and Levis) to the miners, not the prospectors who pursued the dramatically riskier “search for gold” business model. Don’t know if it really applies here, but any company that sells tools or business to business services in any industry has probably been pitched as a “picks and shovels” play.
This one’s really about process controls and efficiency, it appears. More from Hodge:
“The opportunity lies in the old, outdated, and inefficient production process for solar cells.
“The current lines produce a high rate of defective solar cells — as high as 25% in fact…
“A serious loss of time and money for solar makers….
“Solar companies are making cells at a 20% margin loss. And trying to make it up on volume.
“As global demand climbs to unprecedented levels every single quarter, this will cut even deeper into profit margins.
“And that’s why the industry is in desperate need of automated and standardized production….
“Tests show it can yield 99% quality control — an absolutely incredible boost.
“This will bring solar up to the standards of other industries — where the defective rate is 1% or less.
“It can singlehandedly flip a solar maker’s 20% loss to a 20% profit gain.
“So you can imagine why solar makers are lining up to get their hands on this tech.”
OK, so some kind of hardware/software for cutting down on defects in solar cell production… any more details about the company?
“This tiny company’s market cap is only $5 million…
“But it has $10.5 million worth of orders already locked.
“These are orders already set, with the shipments going out.
“That’s double its market cap! But the stock hasn’t even moved. The markets haven’t caught on yet.
“This is a huge under-the-radar opportunity… one that could instantly double your money — and that’s just for starters.
“In total, there are 625 solar production lines worldwide and growing. So this software (at $500,000 a pop) has a market opportunity of $312 million.
“When you add the service costs, it totals up to roughly $500 million.
“That’s 100 times its current market cap — and that’s just on the existing lines.
“All told, early investors could see 10,000% profits in the next few years as the orders roll in.”
So who is it? Well, I suspect this is a re-tease of a company called Aurora Solar Technology (ACU.V in Canada, AACTF OTC in the US), which used to go by the name Aurora Control and was teased by Hodge back in the Fall of 2014. It’s freakishly minuscule, even smaller than it was when he teased it in 2014 (it was a $7 million company then, now it’s about US$4 million — or C$5+ million). The company has made a bit of progress since then, they’ve sold a few of their measurement systems that fit into solar cell furnaces and measure to help identify faults and improve output — now the software that this system uses is called Veritas, and the actual measurement device that gets built into the furnace line is the Decima 3T.
I can’t tell you for sure whether they’ve got $10.5 million in orders “already locked” — they have had at least a half dozen systems ordered over the last year or so, from what I can tell, and each one should represent something like $400,000 in revenue according to the company’s presentation. They seem to see their opportunity as being an “add on” to new next-generation furnaces that are installed, and they have a partner agreement with SEMCO, which is one of the furnace makers. Their investor presentation from last May indicates that they think their system will cost $400,000 per furnace, and reduce costs by over a million dollars per year — which means their customers would get a pretty quick return on investment.
But like I said, it’s absurdly teeny. Investors who are not experts on the industry or technology, or who aren’t company insiders with great insight into operations, are at a huge disadvantage when it comes to nanocap companies with valuations this tiny — there are dozens of companies who specialize in semincoductor testing equipment, which is similar to solar equipment, and there are lots of large solar equipment companies who presumably would have bought this firm by now if it was in possession of uniquely valuable yield-increasing technology (Applied Materials, for example, could user their profit from one week’s work to buy Aurora Control). There may even be companies who sell stuff that’s almost identical to Aurora’s, I have no idea — and most people wouldn’t, because other small companies who are making testing and process control equipment are likely to be hidden inside much larger companies, or just little private operations that investors will never hear about.
That doesn’t mean that tiny companies can’t be valuable, or can’t grow, or even that they can’t fly under the radar and explode into profitability before anyone notices them… but it doesn’t happen very often, and that kind of lottery ticket mentality doesn’t usually serve investors very well. When I’m trying to apply some rationality to my thinking (which doesn’t always work), I might ask myself: If this company’s technology is so great, why are they tiny and independent? If Applied Materials and all the other suppliers haven’t shown any interest in buying this company out, well, do I really know more than they do? That may not be reasonable, but it can at least help to counter whatever lustful jingles these kinds of ads generate in your veins and give you a chance to slow down and think it over.
The company does have some revenue that’s just starting to emerge with their first few sales — and they sell what should be a pretty high-margin product and software package, so there is some possibility that they could become a going concern. If they could sell 10-20 units a year and generate between $4-8 million in revenue (their last four quarters had only $100,000 or so in revenue, so this is assuming a lot), then, assuming gross margins stay pretty high, they could absorb their $2 million+ of overhead and selling costs and begin to post a profit. I’m assuming that’s not how it will go, since they’ll probably have to keep spending more on selling to build up more partnerships, and more on R&D to keep improving their products to keep up with competition (I assume there’s a lot of competition, but don’t know the industry at all), then the business model and the potential gross margins make it at least theoretically interesting.
So whaddya think — have any opinion on these two super-teensy solar(ish) companies? Let us know with a comment below.