Why Kopin Stock – KOPN – Should Be Avoided
A classic question you’ll inevitably hear asked in bee school is what the ultimate goal of a business should be. It’s not to be profitable, or to grow, or to generate revenues. The ultimate goal of a business is to survive. For investors, the problem is that some companies can survive an awful long time without ever actually growing much. While this may be perfectly acceptable for some, it’s a dangerous trap for tech investors to fall into.
We’ve talked before about obvious red flags when vetting tech stocks, but then there are also things to watch for that hint at a stale operation. We might call these yellow flags – the smell of mothballs and patchouli that hints at aged mediocracy. An overreliance on the government as a key customer, a 1980s investor deck that never changes, loads of uncertainty around future revenue streams, and a constant “our latest and greatest product is just around the corner” mantra are all yellow flags, and a company called Kopin (KOPN) is waving all four of them.
About Kopin Stock
The last time we looked at Kopin was back in 2017 when we asked, Is Kopin (KOPN) Turning Into an AR/VR Stock? Now that four years have passed, the company has had plenty of time to capitalize on the growth of augmented reality (AR) and virtual reality (VR). The problem is, neither AR nor VR have managed to accomplish much. That’s kind of like Kopin, a $600 million company that’s been around for more than 30 years – 25 trading on the NASDAQ – yet can’t seem to find its happy place. Just look at the past decade of non-existent revenue growth.
Sure, 2020 revenues at $40 million may be a spark of hope, but we need to look at where that revenue growth is coming from. To learn more about the company, it’s best to pass on their investor deck which was built using Corel WordPerfect on an SVGA 486 running Windows 3.1. Instead, we’ll dive into their latest 10-K to see what’s really going on.
Consumer and Industrial AR
Our previous article on Kopin talked about how they were “increasingly turning an eye toward consumer brands” with the development of their first consumer wearable. There was some banter about how they planned to build “the world’s largest OLED-in-Silicon manufacturing center, hoping VR/AR manufacturers will want to incorporate the technology into their products.” The accompanying pictures certainly looked promising.
The problem is, they haven’t been able to do squat yet related to wearables or consumer brands. In 2020, the combined contribution of industrial and consumer revenues was less than 20% of Kopin’s total revenues.
“The decrease in Consumer applications in 2020 compared to 2019 was primarily due to decreased demand for displays and components used in drone racing headsets,” says the company. That’s pretty much the same excuse we heard four years ago. While their aging investor deck talks about the work they’re doing with Google Glass, the likelihood that Kopin’s technology will be powering any mainstream consumer gadget anytime soon – and generating meaningful revenues as a consequence – seems like a pipe dream, no matter how many new product press releases they pump out.
Progress in Defense
Where the company has made some recent traction is in defense industry sales. In 2020, revenues attributable to “Research and Development” doubled to just over $10 million, about 25% of total revenues. The company says it’s challenging to predict this revenue stream because it depends on being awarded additional R&D contracts in the future and “such awards depend on the U.S. military budget and priorities.” It goes on to talk about risky fixed-price contracts, essentially admitting that the U.S. government has them by the short and curlies.
The remaining 75% of Kopin’s revenues are difficult to figure out. Half are related to defense spending, yet two key defense contractor customers – DRS and Collins Aerospace – account for 62% of revenues.
Confusion aside, we don’t invest in companies that have such a heavy reliance on such a small set of customers. Less than 20% of the company’s revenues in 2020 were attributable to consumer and industrial applications, and we’re not going to sit around waiting for that percentage to improve.
In today’s exciting world of AI algorithms folding proteins, the opportunity cost of wasting time on companies like Kopin is just too high.
The Reddit Crowd
Another concept they teach you in bee school is the efficient-market hypothesis which states that all publicly available information is already priced into a stock. If new information suddenly becomes available, prices adjust accordingly. This helps explain all the volatility you see around earnings announcements. So, when a stock price starts soaring for no good reason at all, it’s typically because it’s being manipulated. Just look at Kopin’s 5-year chart.
A piece in the Los Angeles Times earlier this year talked about “stocks doing well after getting the Reddit treatment,” citing meme stock classics such as GameStop, AMC, and Blackberry. Also mentioned in the article? Kopin. A cursory look at Reddit shows that indeed there are a bunch of morons talking about a train leaving the station, the Kopin rocket heading to the moon, and other useless babble that does nothing but provide evidence of manipulation.
When you see a stock being manipulated, you do not get involved in any capacity. Plenty of very intelligent individuals have had their asses handed to them trying to short meme stocks. As one Redditor said, “we can stay retarded longer than you can stay solvent.” Speculating on the long or short side of any meme stock is a waste of time and money. Meme stocks are usually companies that were never worth looking at in the first place, and Kopin is no exception.
A Case Study
Pissing and moaning about how a company can’t accomplish the sort of growth that matches our lofty expectations isn’t very helpful. What’s more useful is to try and take the limited information we know today and use that to propose how the company might become a contender in today’s fast-moving tech world. In business school they call these case studies. So, what should Kopin do? We believe their problems start at the top.
People complain about how much CEOs get paid while failing to realize what a monumental task they have. The CEO is the person steering the ship with the ultimate goal of fulfilling the company’s fiduciary responsibility to shareholders. The CEO answers to the Board of Directors, but what happens when the Chairman of the Board is also the CEO? That’s a conflict of interest, and it’s not an advisable situation for a company to be in. How can Kopin’s CEO be seen as underperforming in his role if he is his own boss?
The definition of insanity is doing the same thing over and over and expecting different results. Kopin needs a management team shakeup, a new investor deck that inspires, and a plan beyond what platitudes they’ve been spouting for Zeus knows how long. They’ll need some outside inspiration to get away from the “we’ve always done it this way” mindset, and maybe an acquisition or two – perhaps using their overpriced shares – can pave the way for that to happen.
Just hours ago, Kopin announced their Q2-2021 results which resulted in the stock dropping by (peeks at the Bloomberg terminal) about -17%. Clearly, investors weren’t smitten by the $9.9 million in revenues reported (down from $11.68 million in Q1-2021). When revenues are completely unpredictable, this sort of volatility should be expected.
What investors should pay close attention to is how many shares Kopin is selling to raise cash, something that dilutes existing shareholders. From their latest earnings report:
- For the six months ended June 26th, 2021, we sold an aggregate of 2,496,697 shares for gross proceeds of approximately $16.8 million (average of $6.74 per share)
- On June 28, 2021 (the first business day of our fiscal third quarter), we sold 600,000 shares of common stock for gross proceeds of $4.8 million (average of $8.06 per share)
Guess you can’t blame them for making hay while the sun shines.
Kopin may be surviving, but they’re certainly not thriving. That isn’t just because they’re a stale technology company that thrives on unpredictable defense contracts. It’s because both AR and VR have been solutions looking for problems. While there has been some traction in industrial AR, it’s not the hardware makers that are benefiting, it’s all about the software. Kopin may be able to grow revenues by selling more stuff to defense companies, but their ability to do anything disruptive is highly questionable unless they shake things up.
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