Neonode Inc

Fundamental View

First and foremost, Neonode, in a broader perspective, not only works with technology for touch displays but with human interaction in numerous ways. It is therefore important not to pigeonhole Neonode into solely touch display applications. Neonode pursues a multimodal approach and will integrate different types of sensors on its platform and use its own production technology and distribution network to be the front end. In addition, Neonode is surface independent, meaning it does not even need displays or glass. The new business model for Neonode’s touch technology will be manufacturing and selling of hardware modules instead of just licenses. The modules together with the ramp-up of new car and printer models on the won platforms is the key parts of the growth strategy. Besides its many technology competitive advantages Neonode has wide barriers to entry in its automotive focus (see further the investment case section.

Listing: Listed on NASDAQ since 2007
Locations: Headquarter in Stockholm, Sweden but global sales reach

Last updated: 2017-04-03 Source: Redeye

Neonode’s infrared (IR) optics technology was designed to overcome the setbacks in the conventional projected capacitive (pro cap) and resistive technologies used in touchscreens. In short, pro cap recognizes touch by sensing the conductivity in the human body and the change of capacitance when the sensor surface is touched. A resistive touchscreen, on the other hand, is based on sensing pressure. When the finger is pushed on the sensors, typically on a display, the top layer of the sensor flexes and is pushed back onto the bottom layer of the sensor creating a resistance that can be measured and converted to a x and y touch coordinates by a touch controller IC. The resistive technology is cheaper than pro cap but does typically not allow multi touch like pinching the display to zoom. Furthermore, soft touch like swiping does not work well as pressure is needed for detection.

Due to these shortcomings, poor display clarity (less than 83 % light transmission) from film overlays and limitations in industrial design the usage of resistive technology is in steady decline. Neonode’s technology overcomes these issues and in addition possess several important advantages against pro cap. Neonode e.g. does not need any extra layers of plastic or glass substrates, meaning a 100 percent optical transparency, i.e. the best possible image quality. Pro cap in comparison suffers from glare and unwanted reflections from the overlays. Neonode has both lower cost of materials plus a simpler manufacturing process, equal to a higher yield and cost advantages. In addition, Neonode’s technology works in all temperatures and environments, from -40 to 125 Celsiues degrees, without any special properties required from the object user. It even works underwater.

Neonode’s patented zForce technology, in short, uses light or rather the absence of light to determine the position of an object, e.g. a hand or a pen, to register a touch or the movement in a gesture. zForce uses plastic optical elements together with a proprietary scanning chip, IR emitters and receivers to produce an illuminated plane on which reflections from the hand or the object can be detected. Neonode has since 2001 developed advanced optics and lenses that enable their technology to meet the high performance standards required to commercialize the technology and flawlessly mass-produce this technology in the millions. The final products based on Neonode’s touch technology ends up in especially (but not exclusively) the following applications: touch displays in printers, e-readers, infotainment systems in cars and the Neonode AirBar that can touch-enable any non-touch PC. The AirBar platform is only the beginning of several other coming modules and products.

Last updated: 2017-04-03 Source: Redeye

The two dominating competing technologies used in touch displays today are projected capacitive (pro cap or p-cap) and resistive technology. Other technologies have so far not been able to match the price/performance of the traditional technologies. Neonode’s main competitors Synaptics, Atmel, Cypress, Maxim, ELO Touch and Touch International are all, to various extent, in pro cap. They compete primarily on price along with many others. Many contenders with similar technologies to Neonode are rising in or around Neonode’s market but are not targeting the same segments as Neonode with the same concentrated approach. These companies are in general diversified and not even that much focused on touch technology.

The expected CAGR volume market growth is expected to be 10 percent during 2015-2018 but we expect Neonode’s segments to grow substantially faster due to increasing touch penetration and growing interest in human interaction. One example of a major growth driver is that touch panels are cheaper than switches and buttons. The fast market growth also means risk as it provides incentives to invent new technologies together with pro cap’s disadvantages. The largest risk, however, is that the new module strategy will not work due to tier-1 automotive suppliers launching their own competing solutions. As Neonode’s technology is low cost and does not require a specific display or a display at all it has a good fit for many various applications. The most interesting opportunity at the moment is perhaps the many segments where too many different models with low volumes in each no longer is an obstacle due to Neonode’s standardized modules strategy.

Last updated: 2017-04-03 Source: Redeye

  • No stock market trust regarding the new module based business model
  • Short term focus and neglection of the strong position in automotive
  • Break-even and large module deals to drive the stock price
  • Substantial margin of safety

No stock market trust regarding the new module based business model

Neonode is transitioning its business model from selling licenses to hardware modules, which will increase the addressable market more than fivefold and double the gross profit per unit. Our belief is therefore that Neonode is facing a strong growth and that the associated change in investor perception will have major effects on the share. The stock market does not agree with us. We interpret this as a general mistrust towards Neonode’s management who is seen as infamous target missers that only talk and do not execute. We believe this public image will change along with reports showing growth and profitability.

Short term focus and neglection of the strong position in automotive

In addition to the distrust against Management we believe that the stock market compared to us has a shorter horizon, focusing on AirBar and neglecting the strong position in automotive. Neonode’s patented technology has key competitive advantages against today’s dominating technologies (projected capacitive & resistive) when it comes to performance features as low cost, power consumption, best image quality and extreme adaptability. It works on all surfaces and in all temperatures and environments. Neonode’s technology is therefore a perfect match for automotive – its key growth area. In automotive, there are substantial barriers to entry as car manufacturers don’t accept even a 3 ppm defective rate. A supplier therefore has to pass up to 5 years of demanding tests to qualify as a part of a platform. Neonode has passed these tests for customers deploying new automotive platforms and therefore its modules should be installed in every new model for the next decade. The stock market, however, does not fully grasp the implications of Neonode’s success in achieving qualified vendor status of the global automotive OEMs, the new technology acceptance or the ramp-up process of Neonode’s customers. Approximately half of the 36 car models where Neonode’s technology is installed are currently shipping. This will increase significantly in the coming years as new customer car models incorporate Neonode’s technology and the existing customers’ Neonode based touch platforms expand across their entire model line-ups. All in all, Neonode and its strong automotive position together with the new hardware module-based business model is positioned to hit the point of inflection, i.e. a noticeable, positive turning point in the investment case and the stock market’s appreciation.

Break-even and large module deals to drive the stock price

We expect financial reports with black figures to change the perception of investors and move the stock. In addition, large module contracts similar to the USD 11 million deal in the fall of 2016 are important for the share.

Substantial margin of safety

We do not see Neonode as a high risk, high expectations play as it already has the customers, the traction and the ramp-up in existing and coming models to support a substantial growth. Thus, our base case of USD 2.5 per share in relation to our reasonably pessimistic scenario of USD 0.8 implies a substantial margin of safety.

Bear points

In this subsection we acknowledge and rank the, according to us, most serious risks and counter arguments against our investment case, for serious investors to keep an eye on.

1. Failure or delayed success for the module strategy
We cannot at the moment pinpoint a major risk factor in switching to selling modules but with Neonode's history of failures in the past we do not rule out such an outcome.

2. Dual/multi sourcing of printer customer
Intensified competition in the printer segment could cause market share loss and ASP decline.

3. Tier 1 automotive companies launcing their own optical touch sensor modules
Automotive customers relying on in house made touch sensor modules instead of Neonode imply a major risk.

4. Patent infringements
Without the high profit growth from the module conversion Neonode would also easily be subjected to further patent infringements, causing a vicious circle of lower and lower sales, meaning lower and lower means to defend the IP and even more companies infringing on Neonode's patents.

5. Technology risk
The shortcomings of pro cap mean large incentives for development of existing and new competing technologies. In addition, a lot of R&D is focused in improving pro cap (e.g. ITO replacements)

Last updated: 2017-10-04 Source: Redeye

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