Yesterday I was writing about Jeff Brown and his tease of Akoustis Technologies (AKTS) as an RF filter company that should see increasing demand from 5G (each advancing wireless standard is more complex and requires more filters), and that brought this pitch from Chris Wood to mind.

To be fair, this ad is not new. I’ve seen it circulate several times since January, but the offer is not currently “live” (though newsletters that stop soliciting new members soon wither away, so I’m sure they’ll be back to selling sub again soon) — I got it most recently when Marin Katusa was pushing the subscription about two weeks ago, so the info itself is relatively fresh.

The newsletter is from RiskHedge, which itself is pretty new, and is called Projext 5X (list price $3,500/yr). Chris Wood has been around the business long enough to have been covered in this space before — he helmed Casey Extraordinary Technology for a while, recommending tech and biotech stocks, which is presumably why he knows Katusa (who started out working on Casey newsletters and left when Stansberry bought Casey).

The reason this pitch came to mind when writing yesterday’s article is that Wood started off by offering Akoustis as his “freebie” stock pick…

“I’m going to tell you all about the “disruptor” stock pick that’s set to soar 500%, no charge and no strings attached.

“I’m going to tell you the name of the first company right now.

“Its a $200 million RF filter company based in Huntersville, NC, close to Charlotte.

“The company is called Akoustis Technologies Inc. (NASDAQ: AKTS).

“Akoustis is a disruptor.

“It developed a unique kind of RF filter, called a BAW RF filter.

“And even though BAW filters are expensive, customers are lining up to buy them.

“That’s because companies need them in order to take advantage of 5G.

“My research shows that the market for Akoustis’ BAW RF filters should grow by 230% in the next two years, and then take off from there.

“Akoustis is a great company. It grew by about 150% in 2018 alone, and bigger growth is coming.

“But before you buy Akoustis… I’ve got a MUCH more lucrative pick to tell you about.”

And that second stock is also an RF filter company… more from Wood:

“Akoustis could well 5X your money.

“But my research shows that the other RF filter company could make you 20X your money….

“This other RF filter company is, hands down, my top pick of 2019.”

So what clues do we get about this new little fella?

“It has patented a technology that can build custom designs.

“So, they’ll be able to build far more complex filter arrangements than Akoustis.

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“They’ll be able to do it faster and cheaper, too.”

So what does this company do? Can we get a few more clues?

“It doesn’t just sell RF filters. It licenses the design.

“Then it collects royalties every month.

“So, this company has managed to turn a one-time fee into ongoing streams of income, without giving up the intellectual property rights.”

I’ve got a soft spot for royalties, so that’s lovely. Any other clues?

“Right now, the stock trades for less than $3.50 a share. That won’t last.

“In fact, my research says it could surpass $55 a share in three years…”

And then we get a dangerous statement, considering that speculating on a little $200 million company in Akoustis is probably already too risky to play a meaningful role in most retirement accounts:

“If you’re happy with a solid base hit, invest in Akoustis.

“But if you’re looking for a homerun…

“A modest investment in the second RF Filter company could save an underfunded retirement.”

So what’s our stock? This is almost certainly Resonant (RESN), which is, indeed, even smaller than Akoustis… with a market cap of about $85 million… small enough that when one of their investors exercises warrants and generates one million dollars for them it’s worthy of a press release.

So what do they do? They say their “Infinite Synthesized Networks® technology revolutionizes RF filter design and manufacturing.”

No, I don’t know what that means either. Though they are clearly different from Akoustis, not least because they don’t do their own manufacturing and they are trying to sell their filter design system on a royalty basis, partnering with handset makers and other customers to develop custom RF filters more quickly and efficiently, and pocketing a (presumably very small) per-device royalty in return.

They explain it in their nice flashy investor presentation here. Apparently RF filter makers are constrained by low design capacity… which I guess means they have a system that uses less trial and error in the design of specific filters, though I’m not smart enough to be sure.

The company does have a series of informative videos designed to explain things to investors, so that’s worth a browse if you have some time.

The CEO previously worked at Energous (WATT), king of the overpromise/underdeliver small tech companies, so that makes me a little concerned, though I don’t know anything else about him. And they include this line in the presentation, which strikes me as a little silly and too MBA-speaky, but maybe that’s just an emotional reaction:

“Resonant continues to retire risk through execution both internally and externally”

Maybe we should all start saying that — I’m going to “retire risk” now in my portfolio… but how do you execute externally? Maybe that was left up on the power point slide by mistake, like leaving the photo of the model in your new picture frame.

The good news?

They say they have already shipped royalty-earning products.

The bad news?

Either the royalties are super low, or they’re not shipping very many.

Royalty revenue for the full year last year was $159,000. No, not leaving off a comma. And that wasn’t their first year of revenue, they had $40,000 in royalty revenue in 2017. They had other revenue on the year as well, a total of $524,000 (down by about 20% from 2017), but it’s that royalty revenue that is what should be of future interest… and it would have to grow really, really fast to become meaningful.

Why is that, you say? This is a tiny company, isn’t it OK if revenue is low to start? Well, sure, but they spent about $25 million last year — 50% of that on R&D and the rest on selling and overhead costs (SG&A). R&D costs have risen pretty sharply over the years, roughly doubling from 2016 to 2018, but even SG&A expenses have climbed pretty substantially. I don’t know what we should expect for a timeline to revenue growth, but so far revenue is not growing at all and costs are… which is, to an outside observer, sort of bad.

Not terminally bad, sure, but they had to raise $20 million last year… and unless there’s something truly sexy coming into their income statement in the next six months, they’re going to have to raise money this year, too. Assuming, that is, that their expenses continue to catapult higher… which seems likely, given the trajectory created by their limited history.

The real possibility with a royalty company is that revenue can explode IF their customers ramp up production, because Resonant’s cost structure is essentially the same whether one of their royalty-paying customers makes 100,000 filters or 100 million using their design. They have more than 20 designs accepted and 10 products shipped as of now, per their presentation, they have royalty rates in the 8-15% range, which sounds exciting… but these are extremely low-priced components, so volume is critical.

The filters themselves might sell for anywhere from 5-10 cents to 50 cents, so having a customer ship a million of them doesn’t do you much good — you need volume of tens or hundreds of millions to really get windfall-size royalties (these aren’t device royalties like Qualcomm’s controversial ones… these are component royalties, so Resonant might earn, for example, 8% of 20 cents for each item). Which means your customers need to get designed in to some high-volume products.

So the risk, really, is that Resonant’s customers don’t use their designs for the highest-volume products, and the business doesn’t get to the scale required to make sense. If their royalty rate is 10%, for example, and the blended average price of the filters that they sell into RF modules for mobile telecom (or whatever else) is, say, 25 cents, then they need to have their technology used in one billion dollars worth of wholesale RF filter sales to generate enough royalty cash flow to cover their current annual ~$25 million operating expenses.

That’s not completely impossible, I guess, given the large size of the RF filter market and the rapid growth of that sector (thanks in part to 5G), but it’s not likely to come anytime soon unless there’s some surprise adoption of their technology en masse by a huge customer like Qorvo or Broadcom.

By way of comparison, Qorvo (QRVO) is probably the closest to being a large “pure play” RF company, from what I can tell, and their products (which incorporate filters, but add a lot of other stuff to create RF front-end modules) generated sales of about $3 billion last year. That’s Qorvo’s sales of chips and modules to original equipment manufacturers, only a portion of which (I don’t know how large a portion) would be from the actual filters incorporated into the design.

So I remain skeptical of these little semiconductor suppliers, both Akoustis and Resonant seem to have a huge leap to make to even get close to covering their operating expenses, and they’re doing so in a market dominated by giants, so you would have to have a lot of confidence in their technology or patents or management to make a meaningful bet that they’ll have any pricing power or ability to grab enough pennies off the side of the 5G locomotive as it shoots by them.

That doesn’t mean they’re doomed to failure, or that these stocks can’t be appealing for you, just that my limited research over the past day or two makes the risk seem too high relative to the possible reward, mostly because I expect the ramp up of sales growth is going to be too slow to keep investors excited… your mileage may differ, of course, and I could be wrong, the exciting thing about teensy little companies with no revenue is that a single big order or announcement can quickly change the story.

Which means it’s time to turn it back over to you, dear friends — is Resonant an appealing RF filter design company for you? Prefer Akoustis? Think the current dominant companies in the industry like Broadcom (AVGP) or Qorvo (QRVO) are more appealing on the back of rising demand for filters with the 5G transition? Let us know with a comment below.