Today we’ve got another pitch from Jason Stutman to decipher… and it’s actually fairly similar to a teaser ad he was circulating a year or two ago, though the company being hinted at this time is different. The ad is for The Cutting Edge, which will run you $1,499/yr.
As with his teaser pitch last year, his ad this time is built on the idea that some sort of augmented or virtual reality device, smart glasses or a headset, will supplant the iPhone (last time he called it an “iPhone Killer,” though he’s not quite so over-the-top this time around)… and he’s now pitching this as being self-inflicted death for the iPhone, since it’s “Apple’s Secret Device” that he’s counting on for huge gains for his “One Tiny Company.”
But, well, same basic idea… and, in fact, a very similar technological component being teased. How’s that for a hint for you?
Here’s the math Stutman uses to make the huge gains seem possible:
“How the One Tiny Company Behind Apple’s Secret Device Will See 9,900% Gains…
“Stacy Rasgon, an analyst at Bernstein, used Qualcomm’s lost revenue to figure out exactly how much Apple pays component suppliers on average.
“By her math, about $10 per iPhone…
“And here’s why this is significant…
“The tiny $281 million company that’s making this top secret device a reality only pulls in $22 million in revenue annually as of today.
“However, Apple sells up to 55 million phones per quarter — generating $550 million in royalties for component suppliers, or $2.2 billion every year….
“The tiny $281 million company that’s making this top secret device a reality only pulls in $22 million in revenue annually as of today.
“However, Apple sells up to 55 million phones per quarter — generating $550 million in royalties for component suppliers, or $2.2 billion every year.
“If this new device replaces the iPhone, the revenue of this tiny company would explode by 9,900%!”
That’s obviously absurd on the face of it — just take another industry and make up your own example…. I’ll get you started…
Visteon makes steering wheels for Ford’s F-150, at an average cost of about $43 per vehicle. (I’m making all of that up).
Some little supplier company, we’ll call them “Whirligig,” is designing the windshield wipers for a new personal helicopter that will take over all vehicle sales and be a huge hit, so we won’t have to drive through traffic anymore… so, naturally, this new helicopter will be a bigger sales hit than Ford’s best-selling pickup truck.
And since Ford pays $43 for that steering wheel, certainly Whirligig will be able to get $43 for each windshield wiper, right? So if they sell 800,000 of those trucks, then that’s how many helicopters will be sold, so that’s how many windshield wipers will be sold, and Whirligig will suddenly have $34 million in sales!
I’m mostly just poking a little fun there, but it’s easy for readers to get sucked up into these daydreams of “of course that makes sense” arguments that are, once you look more closely, completely ridiculous. The cost of Qualcomm’s chips (or patent licenses) for the iPhone has nothing to do with the cost of a component for an augmented reality display.
To be fair, it’s also hard to make any logical comparisons to the iPhone that you can really take seriously — it’s the most popular and successful consumer product of all time, and it has retained a huge profit margin in a business where profit margins steadily erode. That’s why Apple is an $800 billion company, because their design and marketing prowess has created a business that shouldn’t be possible. You don’t want to count on someone developing the next iPhone and use that as the basis for your modeling of future returns — that’s just asking for disappointment.
In case you’re curious, that $10 for Qualcomm’s share of the iPhone is an estimate that I’ve seen from several analysts, though some go to $15 or higher as well… and it’s not for “average component supplier,” those are Qualcomm-specific estimates, with much of that cash being a royalty for use of Qualcomm’s patents for wireless transmission.
You can find “teardown” articles that try to estimate the cost of iPhone components (there’s one for iPhone 7 here), but they’re all over the place — some of the little doodads cost a few cents, some cost a few dollars, some more critical or complex components, like the touchscreen display, cost well over $10 (but themselves might include components from multiple suppliers).
And, of course, Apple is both secretive and aggressive when it comes to suppliers and pricing — they’re not going to tell you what each piece costs or allow their suppliers to spill the beans, and they’ll also try to pay less each day for every component.
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So yes, be careful of your input assumptions — they make for good ad headlines, but that 9,900% revenue “explosion” depends both on this yet-to-be-sold device having a similar sales volume to the most successful consumer product in history, and on a guess that one of the components of that new device will cost roughly the same amount as Qualcomm’s components in the iPhone. Which means, of course, that it’s good for catching your attention, but you should definitely not take it seriously. Even in that little back part of your lizard brain that tells you to buy lottery tickets.
But, well, that doesn’t mean this “secret device” will be unsuccessful, or that some component supplier might be a reasonable investment… we just have to reset our expectations.
So what other clues do we get about this little company Stutman is recommending?
“If Apple’s secret device becomes the barnstorming success that Cook and insiders expect it to be…
“Our tiny $5 company will grow its revenue a hundredfold…
“From $22 million to $2.2 billion or more.”
OK… and the secret project? More from the ad:
“The official codename for this leaked device is Project Iris.
“It’s a pair of augmented reality glasses. And it’s what the Foxconn insider claims will do to the tech industry ‘what the iPhone did 10 years ago'” ….
“Once Project Iris is released to the world as soon as 2018, there will practically be no reason for the iPhone to exist anymore.
“If you want to type an email, you’ll just tell your glasses what to write.
“If you receive a call, you’ll just have to nod your head to answer and speak through the glasses.”
Okey dokey, so we’ve got the oft-cited possibility that Apple (and other big tech companies) are working on virtual reality or augmented reality goggles/glasses, often referred to as the “next Google Glass,” though usually pejoratively (since Google Glass was a flop with consumers). That’s what Stutman said would be the iPhone Killer starting back in 2016, too, when he was touting HiMax (HIMX) for its components that were used by all of the biggies in the development of their goggles (including Google Glass — which was, lest we recall, a huge hit with investors and journalists for a while before the products really hit the real world… and which did, indeed, lift the fortunes of HIMX shares for a while as the hype spread).
This time, though, it’s some other component supplier that he thinks will be a critical piece of Apple’s augmented reality designs… more clues…
“The most important company in this story isn’t Apple.
“It’s the suppliers — like the $5 stock I’ve been telling you about.
“You see, this company got its start in 1984 with $50 million of DARPA money….
“Today, this DARPA prodigy still works with the military on four augmented reality projects. The most impressive of which is its work for the F-35 fifth-generation combat aircraft….
“And our tiny DARPA prodigy makes the best near-eye displays on the market.”
It sounds like Stutman must have made the rounds at a trade show as well, since there’s a photo of him trying on some augmented reality glasses — which do look refreshingly “normal” compared to Google Glass or those gigantic Virtual Reality headsets from Oculus Rift, et al. More of his words:
“I recently had the opportunity to try out one of its near-eye displays to compare it with others I’ve tested before.
“These glasses were built specifically for cyclists, yet perfectly demonstrated why the company is poised for incredible growth.”
OK, so that sounds like the Kopin Solos or the Everysight Raptor, both of which are smart glasses designed for cyclists (and neither of which is commercially available yet, though they’ve been through hype cycles and kickstarter campaigns and do have a core of eager buyers for the “heads up display” glasses). And the ones Stutman’s wearing in the photo look a lot more like the Solos, which were displayed as prototypes at the last two Consumer Electronics Shows.
So does Kopin match our clues? Well, yes indeed it does — Kopin (KOPN) is a $5-ish stock ($4.50 at its recent peak in mid-September), it did have about $22 million in revenue over the past year, and it was, a couple weeks ago when Stutman’s ad was probably being sent around to the lawyers, a $281 million company (it’s down to $255 million now, with a share price of $3.40). It’s worth noting that they’ll also be reporting their quarterly earnings very soon, on November 7, so things could change quickly.
That’s our match, then, and I’ll spare you any more clues or snippets from the ad (though you can check it out here if you want to see the whole magilla. Or that suave pic of Stutman in his Solos.)
Kopin is quite similar to HiMax in some ways — both are primarily known for their “microdisplay” businesses and components, and both had to reinvent themselves when the biggest commercial/consumer demand for their components, electronic camera viewfinders, withered away. And KOPN has been around long enough to have been a beneficiary of the soaring market for tech stocks leading to the dot com crash… and to be mentioned, along with HiMax, in pretty much every story about the next great thing in heads-up displays, smart headsets, or smart glasses.
If there is going to be a widespread wearable computer revolution that leads to something like smart glasses, Kopin has certainly paid its dues and deserves a try at the brass ring… but we’re not there yet. Back in the early 2010s they got quite a lot of attention for their Golden-i, which was sort of like a bulkier Google Glass headset that was marketed to first responders and other niche markets, but I don’t know that they ever sold very many. It was an idea before its time for a lot of customers, though there are still niche markets — particularly the military — where products like these are in fairly wide use.
How about now? Are we ready for the next wave of augmented reality? Well, we probably won’t see glasses from Apple in the next year or so, unless Tim Cook is blowing smoke, but you never know — certainly the software and display end of augmented reality has taken a big leap forward over the past couple years, most visibly in Pokemon Go but also in many more useful tools, that use the smart phone tools of display and camera brilliantly… and the iPhone includes much stronger augmented reality tools for both users and developers now, so that will probably continue. As we’ve seen with Apple’s earnings this afternoon and their massive backlog of orders for the iPhone X, they’re still selling a helluva lot of iPhones.
Kopin doesn’t have any components in the iPhone, of course, and they don’t get much potential benefit from this “iPhone killer” technology until we start seeing augmented reality that requires microdisplays… and if Tim Cook is right about the quality not being there yet for mass-market augmented reality glasses, then that probably also requires another generation or two of advancement (Apple has a patent application for an augmented display product as well, though it seems to rely on technology that doesn’t exist yet).
Maybe Kopin will lead this technology forward, maybe HiMax will, maybe it will be someone totally different who comes up with a different technology — I have no idea (HiMax has had a better year this year, but has been wildly up and down since 2013 and is also close to 10X larger and profitable, albeit barely, with earnings growth forecasted by analysts). And, of course, maybe it won’t be microdisplays that are important in the end at all, maybe we’ll all have OLED glasses someday, or some entirely different technology that gets that data to our eyes without making us look down at our phones.
So since I can’t predict the future, I’ll stick with the financials. Kopin does do other things aside from microdisplays, particularly in audio processing and batteries (since you’d use voice commands to control your smart glasses, and they need efficient batteries). You can get a reasonable idea of their vision for the sector from an investor presentation they did way back in January… and you can also note that the stock is right about where it was back then.
The shares have dropped recently, I’m not sure why, but the company was reasonably optimistic in their August earnings release — they said all the hopeful things about the next generation AR/VR products coming out, including the next generation of Google Glass (focused on industrial applications, which plays into Kopin’s strengths in producing “rugged” components for the military and others). They did also note that their military business is ramping up now, including F-35 helmets and augmented reality training headsets, and that those Solos cycling glasses were well-received in their first round of shipments and should be on sale in their second-generation iteration by the end of the year, all of which will boost revenues.
Near-term guidance is for 70% revenue growth in the second half of 2017, which would make the current six-month period their strongest sales period since 2011. That won’t likely be nearly enough to get them close to break-even, but they’re not focused on that — they’re still in the investment and product rollout stage, hoping that some of their customers and partners actually develop high-volume products while they get a pretty good chunk of their revenue from military contracts.
I don’t know how it will work out for Kopin, but they do have a great balance sheet with about $85 million in cash, so even if sales don’t materialize in big volume they can keep their R&D and marketing going at a pretty good clip without worrying about money for another year or two. I’m a little skeptical about augmented reality glasses becoming a mass-market “must have” product within the next five years… but, well, I thought cameras in phones wouldn’t ever catch on, either, so please do make your own predictions about the future.
So whaddya think? Interested in a taste of Kopin at these prices? Prefer other suppliers for the potential augmented reality world of the future? Let us know with a comment below.
P.S. We’re trying to collect our readers’ experiences with newsletters in one place, so if you’ve ever subscribed to Stutman’s The Cutting Edge, please click here to share your opinion with your fellow investors. Thanks!
Disclosure: I own shares of Apple and Google parent Alphabet, but no other companies mentioned above. I will not trade in any stock covered for at least three days, per Stock Gumshoe’s trading rules.
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