Neonode Inc

Research note


Neonode Q4 preview: Strong AirBar demand & Automotive bouncing back

For Neonode’s year-end report for 2016, on Thursday March 9, we have not revised our estimated sales of USD 3.5 million, even though sales of the customers’s car models has been strong. Weak Q3 sales of the BaoJun 560 will likely affect Neonode’s Q4 license revenue but in Q4 BaoJun 560 sales were up almost 80 percent sequentially, as its (non-Neonode-related) production problems had been solved. We expect a Q4 loss of around USD -1 million since the addition of AirBar sales channels seems to have taken a few weeks longer than planned and sales therefore started ramping a bit later than we initially thought.

Neonode were targeting an AirBar capacity of 3 000 per day in December. If Neonode has managed to reach that objective it would be a pleasant surprise although we suspect AirBar sales for Q4 might disappoint the stock market. However, this is solely a Q4 issue, according to us, as the AirBar demand has been strong since the channels were fully in place. AirBar has e.g. had a continuing strong ranking on Amazon's best sellers in its cateogry and the price has been increased from USD 69 to USD 79. In addition, AirBar’s stock has sold out several times during the quarter and it has been ranked as the most desired monitor accessories product on Amazon (currently number 3), although these two factors might also serve as indicators of a slower production ramp-up than desired. Thus, we also suspect that the gross margin of the AirBar sales in Q4 will not be close to 50 percent but rather half of that percentage, which is of course also a short term Q4 volume issue, given the scalability in the 99 percent automatized Kungsbacka fab. 
We see multiple new car models likely to be launched on the Neonode platforms within the near future and we hope Neonode can bring some news in this regard in its Q4 report. We believe that wihtin a few years we could be looking at the excess of 6 million cars annually, only on existing platforms, equal to an Automotive profit contribution of over USD 36 million, assuming 100 percent module conversion and only one module per car (totally leaving out the much more expensive steering wheel modules).

We reiterate our base case of USD 3.7 per share as well as our bear case of USD 1.2, implying a rather deep margin of safety and 127 percent upside. Consensus is estimating a Q4 loss, although Management mentioned break-even in its last earnings call, something we believe will be challenging given the late AirBar ramp-up. We suspect the stock might take a hit on the report as not meeting break-even expectations could add grist to the short sellers's' mill. 11 percent of the free float remains shorted and days to cover is now a whopping 54 days.

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