Based in Stockholm, Sweden, Neonode Inc. (NEON) is the go-to company for advanced optical sensing solutions, including touch, contactless touch, gesture control, and remote sensing. Substantial growth in its TSM sales in the last reported quarter due to the rising demand for contactless touch applications for elevators and kiosk applications from Asian customers has helped the stock gain 55.4% over the past three months.

However, NEON’s stock is currently trading 21.2% below its 52-week high of $12.42. Although Korean contactless solution provider Doostek’s recent selection of NEON’s Touch Sensor Modules for contactless kiosk trials at an airport and other strategic partnerships have helped its stock gain 19.4% over the past five days and 107.9% over the past month, the company’s cash burn rate and negative profit margin could make investors wary. In addition, the pandemic’s negative impact on its customers’ businesses and their sales volumes could, in turn, hamper NEON’s business growth.

Here’s what could influence NEON’s performance in the upcoming months:

Pandemic-related Risks in Business

The resurgence of the COVID-19 pandemic has caused NEON difficulties in obtaining deliveries of components needed to manufacture its sensor modules. In addition, the challenges in delivering the company’s products to its customers in time and at a reasonable cost could negatively impact its sales volumes in the near term. Even though NEON has witnessed additional demand for its contactless touch products and licensed products, the pandemic has affected its customers’ businesses, which, in turn, has negatively impacted its business.

Bleak Growth Potential

NEON’s EPS is expected to remain negative in the current year and next year. The consensus EPS estimate for the next quarter (ending December 2021) indicates a 27.3% decline year-over-year. Moreover, analysts expect the company’s revenue to decline 15.5% from the year-ago value to $2.06 million next quarter. Also, the stock has not beaten the consensus EPS estimates in three of the trailing four quarters.

Inadequate Financial Strength

During the second quarter that ended June 30, 2021, NEON’s non-recurring engineering revenues declined 11.1% from the prior-year quarter to $16 thousand. It reported an operating loss of $1.8 million. The company’s net loss amounted to $1.66 million, compared to $1.61 million in the prior-year period. NEON’s operating expenses rose 37.8% from the year-ago value to $3.3 million. Furthermore, its net decrease in cash stood at $3.86 million for the six months that ended June 30, 2021. In addition, its net cash used in operating activities grew 76.6% year-over-year to $3.41 million during this period.

NEON’s trailing-12-month ROTC, ROA, and ROE came in at negative 65.3%, 52.4%, and 80.2%, respectively. Also, the company’s trailing-12-month cash from operations of negative $7.23 million compares with the industry average of $112.30 million. Furthermore, its trailing-12-month net income margin and EBITDA margin are negative 84.8% and 82%, respectively.

Stretched Valuation

In terms of forward EV/Sales, NEON is currently trading at 14.12x, which is 246.3% higher than the industry average of 4.08x. In addition, its forward Price/Sales ratio of 15.35x is 277.6% higher than the industry average of 4.07x. The stock’s trailing-12-month Price/Book multiple of 9.53x is 104.5% higher than the industry average of 4.66x.

POWR Ratings Reflect Bleak Prospects

NEON has an overall grade of D, which translates into a Sell rating in our POWR Ratings system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree.

Our proprietary ratings system also evaluates each stock based on eight different categories. NEON has a C grade for Quality. The stock’s negative profit margin is in sync with this grade.

Also, it has a D grade for Value and Growth. The stock’s higher-than-industry Price/Sales is consistent with its Value grade. And its weak earnings and revenue growth prospects justify its Growth grade.

In addition to the grades I’ve highlighted, one can check out additional grades for NEON, including Sentiment, Momentum, and Stability here.

NEON is ranked #41 out of 46 stocks in the B-rated Technology – Hardware industry.

Bottom Line

While the increasing interest in NEON’s contactless touch technology and its TSM solutions from customers across Asia, Europe, and North America have helped the stock gain significantly over the past month, its revenue growth has not translated into profitability yet. Furthermore, the pandemic-induced challenges in its business could pose a threat to its growth path. Thus, the stock is best avoided now.

How Does Neonode Inc. (NEON) Stack Up Against its Peers?

While NEON has an overall grade of D, one might want to consider looking at its industry peers, Seiko Epson Corporation (SEKEY) and Canon, Inc. (CAJ), both of which have an overall grade of A (Strong Buy).

NEON shares were trading at $9.94 per share on Monday morning, up $0.15 (+1.53%). Year-to-date, NEON has gained 47.26%, versus a 16.22% rise in the benchmark S&P 500 index during the same period.

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.

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