Is Kopin (KOPN) Turning Into an AR/VR Stock?
Earlier this year, we lamented the fact that there are few opportunities to invest in pure-play stocks for virtual reality companies at the moment. After all, 2016 saw an explosion in virtual reality (VR) with the release of the Oculus Rift and a host of other headsets. HTC Corp (TPE:2498) is probably the closest thing there is to a virtual reality stock since most of the competition is wrapped into mega-corporations or private startups.
Funding to VR and augmented reality startups hit an all-time high of $1.8 billion last year. Some market prognosticators are saying the AR/VR market could be worth upwards of $120 billion by the end of the decade. Who wouldn’t want to jump on that gravy train? That’s why when we got an email from a PR hack marketing consultant pushing Massachusetts-based Kopin Corp. (NASDAQ:KOPN), we weren’t surprised that someone else was as intrigued as we were about a company that has been around for more than 30 years—25 trading on the NASDAQ—that appears to be shifting its entire business towards augmented reality (AR) and virtual reality (VR).
At the helm of the company is John Fan, a PhD who spun Kopin out of MIT with a group of engineers and scientists in 1985. The company specialized in transistor wafers for mobiles phones and liquid crystal displays, or LCDs, for devices like video cameras. It rode the dot.com bubble like many a tech company before flat-lining pretty much until the present-day.
Penny for Your Thoughts
While not exactly a penny stock, Kopin has traded below two bucks in the last 52 weeks but hit $4.26 this month before sliding down to the mid-$3s as of this writing. Why does that matter? Because they need to stay above $4 a share over a sustained period of time to continue trading on the NASDAQ else they’ll be downgraded to the “over-the-counter (OTC) market“, the ghetto of stock exchanges.
Kopin has a market cap of $258 million, more than double where it was about a year ago. Profitability and consistent revenue growth seem like foreign concepts to Kopin over at least the last several years, as you can see for yourself in the chart below:
This is the sort of performance you’d expect from a social media startup or maybe Radio Shack. The not-quite-as-bad year of 2013 in terms of net losses was largely thanks to the finalized sale of the company’s transistor business, which are still used in millions of smartphones and other mobile devices.This year hasn’t really started off any better for Kopin. It suffered a net loss of $7.9 million, or $0.12 per share, in the first quarter of 2017. That’s actually worse than a year ago, when losses were at $6.9 million or $0.11 per share.
Shrinking Products and Profits
Kopin’s core business today is in super-shrinking LCDs and other high-resolution micro-displays and developing optics and other components for wearable technology, particularly for military and government customers, though it’s increasingly turning an eye toward consumer brands. It recently released a consumer AR sportswearable and has developed what it claims to be the best speech recognition system on the market. None of that is making it much money at the moment.
Total revenues for the first quarter this year were $4.4 million, compared with $6.1 million for the first quarter last year. In particular, sales of its wearable applications dropped from $2.6 million a year ago to about $700,000 last quarter. Kopin says the decrease was due to a drop in drone applications, as customers shift to buying the company’s higher resolution displays. The rosy spin from the earnings call was that revenues for that business should recover through the rest of the fiscal year.
It’s unclear if the company will recover revenue from customers like the Department of Defense or prime defense contractors like Raytheon. This is also not an encouraging graphic.
The heady days of getting $50 million from shadowy DoD agencies like DARPA to develop wearables are over. Kopin, however, is providing the optical displays for the AR helmets used by fighter pilots in the F-35 Joint Strike program, which has somehow survived innumerable controversies and blown budgets. In fact, the government has put in an order for 90 more F-35s at nearly $100 million a pop. The company is also on track with another military program called Family of Weapon Sight to provide a weapon sight eyepiece component.
Money in the Bank
It’s not like Kopin’s management team is reaching between sticky couch cushions looking for loose change to keep the company afloat. It’s not carrying any long-term debt, and it had about $67.8 million in cash and marketable securities at the end of the first quarter this year. It also got a chunk of change recently from a Chinese company called Goertek, which manufactures a range of consumer electronics products for brand customers including wearables, VR/AR headsets and audio products. Goertek paid $24.6 million for about 7.6 million shares of Kopin common stock—about 10 percent of the company.
The Future is so Bright (?) I Gotta Wear Shades
The companies are collaborating on a range of new VR/AR headsets using Kopin’s trademarked optics and its Whisper speech recognition chip technology, backed by 30 issued and pending patents. The company is touting Whisper as the next step in voice interface technology, with the ability to distinguish voice commands in the noisiest environments, even the hot dog line at a Yankees game. Goertek is also expected to lend its expertise to the development of Kopin’s first consumer wearable—SOLOS – an AR headset that looks like a pair of Lance Armstrong sunglasses with all the douchebag attitude that that entails. Look how small that display is:
The first generation was designed with cyclists in mind, displaying all sorts of stats such as speed and heart rate from various sensors through the heads-up digital display seen above. The U.S. Olympics cycling team used the SOLOS as part of its training for the Rio Olympics:
The Manchurian Candidates
Kopin is partnering up with other companies in China to advance another one of its newest AR/VR pieces of technology—the Lightning OLED micro-display. An OLED is an organic light-emitting diode used to create digital displays in everything from TVs to mobile phones. Kopin claims to have produced the world’s smallest OLED with the highest resolution (2048 pixels X 2048 pixels in a one-inch diagonal screen).
The superfast frame rate is supposed to eliminate the latency that causes some users to become nauseous using VR headsets.
Kopin will ramp up production of the Lightning OLED after a recent agreement with a company in Yunnan, China, called Olightek Optoelectronics Technology to procure a machine to manufacture the component for use by next year. In two years, working with a third Chinese company, BOE Technology Group, Kopin will build the world’s largest OLED-in-Silicon manufacturing center, hoping VR/AR manufacturers will want to incorporate the technology into their products.
Kopin (NASDAQ:KOPN) is an interesting case study. Its short-term—and even mid-term—profitability is certainly questionable. It’s had some audit and other, shall we say, ethical missteps in the past. It’s a bit like watching Radio Shack trying to turn itself into Amazon or Google. The problem, of course, is that Amazon and Google already exist. On the upside, the company has longevity on its side, and it obviously knows how to compete and win government business. Can it achieve long-term viability as a picks-and-shovels play on AR/VR? Its new technologies sound promising, but we’ll have to see if anyone else is buying it.
Here at Nanalyze, we hold the lion's share of our investing dollars in a portfolio of 30 dividend growth stocks. Become a Nanalyze Premium subscriber to access our report on Quantigence - A Dividend Growth Investing Strategy. We'll show you how we selected our 30 stocks and teach you how to build your own dividend growth stock portfolio.