Welcome to C.H.A.O.S. by Marty Biancuzzo
When people hear the word “chaos,” they fear the worst.
Not me. I embrace it. I thrive on chaos.
Chaos is actually a brilliant force.
Chaos nukes the status quo…
Chaos disrupts entire markets…
Chaos kills existing industries…
Take Apple (AAPL), for example.
Apple is a perfect example of a company that wreaked unbridled chaos.
The launch of the iPod killed every record store in the United States.
Along the way, Apple made investors rich.
Netflix (NFLX) is another perfect example.
It created chaos in the movie rental market, driving once-great Blockbuster into bankruptcy.
Along the way, Netflix made investors rich.
To put a twist on Gordon Gekko’s famous line in the movie Wall Street, “Chaos is good. Chaos works.”
I Was Hired to Unleash C.H.A.O.S…
Publisher, Robert Williams, hired me to bring my C.H.A.O.S. strategy to Tech & Innovation Daily readers.
Give me 60 days, and I’ll prove to you that my C.H.A.O.S. strategy can make you rich.
I’ve never released C.H.A.O.S. to the public before today.
Each letter in my C.H.A.O.S. strategy represents a specific metric. One that’s infinitely important to a company’s investment potential.
Individual letters are assigned a score ranging from one to 20, then added together for a maximum possible score of 100.
Only seven companies in the history of C.H.A.O.S. have scored a 100.
Apple is one of them.
Here’s how this is going to work…
I’ll ONLY recommend buying companies that score 85 or better on the C.H.A.O.S. meter.
Reason being, historical precedence shows that these companies will 1) create so much chaos that existing industries will be forced to adapt, and 2) enjoy stock gains worthy of a king.
Today, I’m putting “touch technology” firm, Neonode (NEON) to the test.
I’ve tracked the company for some time, even meeting with it’s top brass at the Consumer Electronics Show.
But does Neonode pass my ultimate test?
When assessing a company’s chaos-inducing potential, I always start with its cash. Why?
Because cash is king.
Without it, you’re dead.
But if you’re sitting on a large pile of it, you have a major advantage.
At first glance, Neonode appears to have the winning edge.
The $210-million-market-cap firm boasts $8.8 million in cash. What’s more, its 56% gross margin means that for each dollar of revenue, Neonode keeps $0.56. That’s 93% higher than its rivals in the electronics industry.
But when you dig deeper, the waters quickly turn muddy.
You see, Neonode’s other key financials are – to put it bluntly – ugly.
For example, while Neonode holds far more cash than its peers, its operating margin and return on equity are significantly worse than its competitors. Its earnings growth is also weaker.
On the valuation side, Neonode trades at a heavy premium to its industry average in terms of its price-to-sales and price-to-book multiples.
While the company has zero debt, the rest of its financials are very weak and it’s not putting its cash to work effectively. In fact, if Neonode remains at this pace, it’ll need to take on debt by the end of fiscal 2014.
C.H.A.O.S. Meter: 5/20
There’s nothing more important than a technology’s impact on society and its presence in our lives.
I call this “high-impact” technology – and it’s a game changer for any company.
I look for a technology’s potential to catapult from niche to “must have” in short order. And when that scale of demand swells, it reaps rewards for the company and its investors.
That’s why I want to see the company and its technology explode in the media. I want to see news exposure. Most of all, I want it to strike fear in its market.
Neonode’s high-impact factor is its multi-touch proximity sensors. Like this…
There’s no doubt in my mind that Neonode’s “touchless” touch technology is unique and game changing. But it lacks the buzz to make it an immediate sensation.
C.H.A.O.S. Meter: 17/20
When it comes to growth, I don’t like to wait. I’m sure you don’t, either.
So I look for companies ready to grow now – and grow fast.
Neonode’s ace in the hole here is its patents.
It holds 114 intellectual property patents in six main categories: User Interface (UI), Optics, Application Specific Controller Integrated Circuits (ASICs), Drivers, Mechanics and Applications.
The company’s 10-K SEC filing indicates that it’s considering “strategic alternatives” for its IP patent portfolio. That could mean licensing the patents, or even selling them as part of a merger.
Neonode’s User Interface patents are its most valuable assets – including the famous “Slide-to-Unlock” feature on iPhones.
Yes… despite the epic Apple-Samsung patent battles, it’s actually Neonode that holds the exclusive patents for this particular technology.
This information has crippled Apple’s slide-to-unlock patent claims against Samsung.
If Neonode is considering selling or merging these lucrative patents, it may be exploring a selloff or merger of its entire business.
And if nothing evolves, Neonode has talked with patent troll firm, Acacia, to help better monetize its UI patents.
Any upswing could prove disastrous for Neonode’s short sellers. With 36% of the shares sold short, they’d be forced to buy back shares, thus pushing the price higher.
But here’s the ultimate question: Are Neonode shares primed for an ungodly jump in the short term? There’s only a moderate likelihood.
C.H.A.O.S. Meter: 13/20
Ideally, we’d love to see a massive backlog of orders piling up.
If not, the company should at least have a market-ready product to attract customers.
Well, business at Neonode is booming!
The company is also in talks with Hewlett-Packard (HPQ) to incorporate its touch technology into HP’s printers, laptops and computers. Rumor has it that the two companies have already signed a deal.
Neonode is also discussing possible relationships with LG (LPL) and Nvidia (NVDA) – along with Zagg (ZAGG) and Logitech (LOGI), which are looking to include NEON’s technology in their mobile accessories.
In the auto industry, Volvo (VOLVY) is using Neonode’s technology in its Sensus model and will integrate it into its 2015 lineup.
At the end of the last quarter, Neonode had 33 technology licensing agreements with OEMs and ODMs, and the firm recently hired ex-Hewlett-Packard engineer and project manager, Clarence King, to help expand its PC business. King boasts 33 years of experience in consumer electronics, optical imaging and interface solutions, and will manage Neonode’s partnerships with PC clients.
These contracts and licensing deals are all well and good, but Neonode hasn’t done much to monetize them and turn the deals into a profit.
It has speculative “deals” on the table that could be catalysts… but we don’t deal in speculation here.
The main downside is that Neonode recently lost business from Amazon (AMZN) for its Kindle e-reader – a major factor in Neonode’s poor financials.
C.H.A.O.S. Meter: 11/20
The question here is simple: How is a company scaling into new markets?
I always look for billion-dollar market potential – and Neonode is prominent in several massive industries…
- Automotive: Touch displays are now standard in many vehicles. Neonode’s optical touch solutions are positioned to grow substantially, as the “connected car” and infotainment market hits $98.2 billion by 2018, according to Markets and Markets.
- Internet of Things: Neonode makes AlwaysOn touch sensors for connected devices. That makes it perfectly positioned to grow, as the Internet of Things balloons into an $8.9-trillion industry by 2020, according to IDC. Indeed, as our world becomes increasingly connected, Neonode’s technology is present in a wide range of consumer electronics, such as mobile phones, tablets, e-readers, gaming consoles, GPS, printers, household appliances… the list goes on.
- Wearable Technology: Neonode is breaking into the fast-growing wearable space. The company recently announced its new “Circular Multi-Sensing” platform, developed specifically for wearable electronics. The new technology is waterproof and designed to give enhanced gesture control and touch functionality in growing areas – like the fitness and medical segments. Again, the market here is massive, with wearable technology projected to hit $50 billion by 2018.
If Neonode fulfills its potential, it will benefit greatly from these multi-billion-dollar industries, set to trend higher over the next few years.
C.H.A.O.S. Meter: 18/20
The Verdict: Neonode has cool technology, but is it going to wreak chaos on the market anytime soon? Probably not.
Are you going to become a millionaire from its shares? Nope. The stock has traded in a stubborn range between $5 and $7 for most of the past 18 months. And there’s no real catalyst to suggest that it will soon break out beyond its high over $8, set last summer.
However, if you want to make a speculative, short-term trade for a quick profit, Neonode does offer some value. The Nasdaq’s recent woes have dragged tech stocks down, so this is a good chance to buy on the dip. If it can rebound to the $6.30 level from just two weeks ago, that would represent a quick 10% gain.
Your eyes in the Pipeline,