October 27, 2017 -
As the biometrics industry continues to grow, Biometric Update is bringing a new focus to the stories around the stocks in the sector. Check in with this space each week for a rundown of the financial news and interesting ideas from the week that was.
Markets continue to trade near record highs. Why this continues to be the case was the subject of an interesting letter released this past week by controversial, high-profile New York-based hedge fund manager David Einhorn, the CEO of Greenlight Capital. The firm made a killing shorting the stock of Lehmann Brothers as that company collapsed in 2008 at the start of the Great Recession. Einhorn has also made some epically bad bets, but claims to produce a 25% annual return for investors in the fund since inception. So he’s a bit of a legend. The fund just released its most recent financial report. In a letter accompanying the third quarter results Einhorn speculates that stock markets seem to have adopted a new way or “alternative paradigm” for calculating the value of stocks. Traditionally investors have assumed that Warren Buffett’s classic ‘value-based’ approach to investing is the best approach. This method sees investors searching out imperfections in the relative pricing of companies. The idea is simple: Find a company that is producing results that are better than the value reflected in the stock price. Invest in that company. Eventually market forces will ensure that the stock price will rise to reflect the true value of the company. But this theory may not work like it used to according to Einhorn. “The market remains very challenging for value investing strategies, as growth stocks have continued to outperform value stocks. The persistence of this dynamic leads to questions regarding whether value investing is a viable strategy,” Einhorn writes. He might have a point. Many investors today (including Buffet) have commented that asset prices are expensive. It is more difficult than ever to find any assets that are underpriced and would make a good value-based investment. Some suggest the rise of exchange traded funds have had an impact. Many investors now are no longer invested in single stocks, or even actively managed mutual funds, but are simply invested in ETFs that spread an investment across a wide index of companies. ETFs are considered passive investments as a result. They simply invest in an index. There is no study of underlying companies. As money have flowed into these low-priced vehicles the basic dynamic of markets is shifting. The old ‘mispricings’ in stocks are no longer there as they used to be. High frequency, AI-based trading programs also “arbitrage” away those mispricings in milli-seconds now. Einhorn sums up market reality this way: “Given the performance of certain stocks, we wonder if the market has adopted an alternative paradigm for calculating equity value. What if equity value has nothing to do with current or future profits and instead is derived from a company’s ability to be disruptive, to provide social change, or to advance new beneficial technologies, even when doing so results in current and future economic loss?” At the same time as value investing has become more difficult, technology stocks have continued to be strong performers. Einhorn sees this as proof that something in unique is occurring. There is broad-based digitization occurring as the IoT emerges. The AV world is emerging. Companies building this new economy (Google) are being favoured by investors. Even though the stocks are expensive they are still considered the best investment out there. Google and Amazon are emerging as the mighty corporate giants of the next economy. So investors keep buying their stock, while the brick and mortar retail sector burns down. Arguably Einhorn’s ideas found some confirmation in events this week as earnings season got underway. Google’s parent company Alphabet delivered, “a knockout quarter today, handily beating the estimates from Wall Street,” according to one media report. Shares in Alphabet have traded above $1000 per unit this month. Amazon also reported good earnings, sending shares in the company up to $972.43 today.
-Within the biometric sector there were several interesting stories related to the publicly-traded companies that make up the industry.
Aware Inc. reported financial results for its third quarter ended September 30, 2017. Revenue for the third quarter of 2017 and 2016 was $5.9 million for both periods. Operating income in the third quarter of 2017 was $1.7 million compared to $2.3 million in the third quarter of 2016. The decrease in operating income was attributed higher research and development expenses and lower patent related income. Net income in the third quarter of 2017 was $1.2 million, or $0.06 per share, which compares to $1.6 million, or $0.07 per share, in the same period a year ago. The decrease in revenue and operating income was due primarily to a large biometrics software license sale to a U.S. government military customer in the second quarter of 2016 (whereas there was no sale of that size in the first nine months of 2017). The resulting decline in operating income was partially offset by higher patent related income from a lower cost of software licenses and a lower cost of hardware sales. Aware’s CEO was quoted as saying, “The financial performance of our business was stronger than in the second quarter. Revenue and operating income were lifted by a large license sale to a medical imaging customer as well as continued business from significant government customers. We continue to make investments in our commercial/mobile business as evidenced by the introduction last week of our Knomi mobile authentication framework.” According to the release, “Knomi utilizes face, voice, and keystroke dynamics to enable multi factor biometric authentication from mobile phones.” Shares in Aware were trading at USD $4.60 at the end of the day Thursday, advancing 2.2% on the day.
An investment-focussed website finds that shares in Nxt-ID are now up about 40% compared to a 12-month low of $1.21. Security Exchange Commission (SEC) filings also show that at the end of June reporting period seven institutional holders increased their position in Nxt-ID. The stock also attracted investments from five new institutional investors in the period. Investments from institutional investors like pension funds are a good sign for a stock. Institutional investors are often considered more professional and knowledgable than the average retail investor. Shares in NXT-ID ended the day at USD $1.85 up almost four percent on the day.
There has been some interest from institutional investors in other biometric stocks as well. SEC filings show that Koch Industries Inc., purchased a new position in Nuance Communications Inc., during the second quarter. According to the filings the company purchased 553,110 shares of the software maker’s stock, valued at approximately $523,000. Koch Industries, of course, is run by the infamous Koch Brothers, major backers of the Republican Party. Other firms that have upped their holdings in Nuance include Commonwealth Bank of Australia, which upped its position in Nuance by 29.6% in the second quarter. Bank of Nova Scotia purchased a new stake in the company during the second quarter, buying up 92,890 for an approximate stake worth $1,617,000. Shares in Nuance ended the day at USD $15.23, up almost two percent.
NEXT Biometrics Group ASA announced this week it won Frost & Sullivan’s prestigious annual “Enabling Technology Leadership Award” for its fingerprint sensor technology. Research firm Frost & Sullivan said the award was presented in recognition of what it called NEXT’s “innovative technology, strong overall strategy, and competitive production advantage.” NEXT CEO Ritu Favre said the award “recognizes the superiority of NEXT’s large cost-effective and highly-secure flexible and rigid fingerprint sensors.” Shares in Next were trading off a bit over two percent today at NOK 54.25.
Precise Biometrics AB enjoyed a huge price spike recently, jumping 41% on the 22nd of October. Shares in the company are relatively volatile. The stock sports a 52-week low of 1.3 and high of 4.63. On Thursday it ended the day at SEK 1.90, down about 7.2%.
Diebold Nixdorf fell 7% after the other big ATM manufacturer, NCR, reported disappointing fourth quarter results Thursday. Shares in Diebold are trading around USD $20.60 at the end of the day Thursday.
Fingerprint Cards will conduct a ‘Technology Update’ webcast on November 1, 2017. The webcast will cover the Swedish biometrics company’s core business of capacitive sensors in smartphones. The company will also provide up-to-date information on new segments and technologies including smartcards, IoT and iris recognition. FPC will also give an update on the firm’s views regarding, “In-Display and other new applications and technologies.” The presentation will be webcast live at 14:00 CET. The company also noted this week that it was “well represented and received” at last week’s Female Engineer Network (FEN) event. The team attracted attention by demonstrating devices. FPC also announced this week that its fingerprint sensors will be used in a number of new Huawei smartphones. The two firm’s have worked together for more than three years. Huawei’s Mate 10 Pro and Mate 10 Porsche Design are shipping with the FPC 1075. The company expects to start high volume shipments for the Mate 10 very soon. Additionally Huawei’s Nova 2i and Honor 9i launched with the new FPC1028 sensor. According to the company, “The FPC1028 has an ultra-low power consumption and a small footprint resulting in a very compact and affordable sensor.” These two mid-tier smartphones are targeted for Malaysia and India.” Shares in FPC ended trading Thursday at SEK 16.70.
Another interesting event takes place in London England, November 2nd. IDEX ASA will host a Capital Markets Day from 10am GMT at The Clubhouse Bank in the City (as the financial district is known). The IDEX executive team will present a detailed update on strategy and progress, with a focus on the biometric card market. The report is an interesting document and highlights a key contemporary idea that anyone within the industry knows: “The market for biometric cards is now on the cusp of commercialization. On the back of widespread adoption of biometric solutions in mobile devices there is significant demand from customers including; banks, retailers and government institutions for biometric card payment solutions.” IDEX now has a partnership with Mastercard. It has undergone several successful real-world customer trials with large multi-nationals including; ABSA Bank, Unicredit Bank and retailer Pick-n-Pay and is progressing into the certification phase prior to commercial rollout. So there will be lots to talk about at the presentation to investors. Also driving the market are new compliance measures that are bringing more exacting performance standards to the industry. The tragedy of the Equifax breach is a perfect example. Average consumers have been dismayed at the rickety security guarding their personal information. As it becomes clear a new level of security has to come into play to make the IoT work IDEX can be expected to capitalize on the worry and the solutions to the current data loss crisis. Key to the IDEX product is a sensor that requires no battery or special components. The company also said it will offer a patented low-cost, on-card remote enrolment system for home use in 2018. According to the company, “This provides our customers with a fully integrated, highly secure, convenient and low cost biometric solution that is unique to IDEX.” It’s a good story that IDEX will have for potential investors in London. IDEX was trading up almost four percent on the day, hitting NOK 4.99.