Vuzix - Time machine back to the tech bubble? Why I'm playing the short side

Its been more than 15 years since the days of the tech bubble when stocks soared on hope, promise and dreams.  Companies were popping up almost daily with innovative technological ideas and investors stormed in, sending valuations to insane levels.  Seeing companies with market capitlizations of $100+ million became the norm, even when profits were non-existent and dilution was the order of the day.

But with public companies, whether back in the days of the tech bubble or now....its always about the future. Back in the nineties investors saw firms burning through billions of dollars on tech solutions and e-commerce ideas that promised a new paradigm.  But ultimately it was the old paradigm of simple economics that did them in. Eventually a company has to bring in more revenue than it spends...that's reality.

So what's the dream with Vuzix?  

Smart glasses for business and entertainment providing things like 3-D virtual reality.  Its an exciting concept certainly, and I can certainly see it being a viable space.  The question is will Vuzix as a company be able to make a go of it.  

Back in the dotcom era lots of companies were going to be huge successes in delivering E-Commerce solutions, and some did, Amazon springs immediately to mind.  But for every Amazon there were hundreds of other companies that imploded, Pets.com, Etoys, Digiscents, Go.com and on and on and on.

Some of these companies had big players buying into their ideas, companies like P&G and Disney, big name athletes like Michael Jordan and Wayne Gretzky were backers.  But business is business, and eventually revenues have to be sufficient to sustain operations.  Even the sheep get tired of throwing money at an idea, at some point investors want to see solid bottom line performance.

Vuzix is far from a new company, they've been around since 1997 which will soon put them into their third decade of existence.  They started out as VR Acquisition Corp, then became Kaotech, then Interactive Imaging Systems, then Vicuity, then Icuiti.  In 2007 the company adopted its current name of Vuzix. 

According to the company's SEC filings they have incurred net losses since their inception, with a reported $13,4 million net loss for the year ended December 31 2015 and an accumulated deficit of $57.6 million as of that same date.  A loss of $10+ million per year means they're going to have to sell an awful lot of glasses at a decent profit margin to achieve positive cash flow.  

Revenue is great, but business doesn't operate in a virtual reality world.  In the real world revenues need to eventually surpass expenses. 

And then of course there is competition from companies like Google and Sony.  Maybe Vuzix will be the David that slays the Goliath players in the market.  My Christian faith notwithstanding, when it comes to the business world I find its usually Goliath who wins.

Bulls, promoters touts and shills will no doubt point to the small float with WSJ reporting just over 17 million shares outstanding and a float just shy of 13.5 million.  But they will likely fail to mention the share consolidation that took place in February of 2013 when VUZI enacted a 1 for 75 reverse stock split.

Bulls will also undoubtedly take issue with all the old information I've just provided and will point out, quite correctly, that investing is about the future not the past. That is true, just because a player has a career batting average of .220 over ten seasons, that doesn't mean he can't turn it around in season 11 and challenge for the batting title.  But if I'm betting on the outcome, I won't risk money on a .220 hitter winning a batting crown.

Ultimately though the reason I placed my bet on the short side on Friday September 2nd just after the opening bell....Its because in my opinion the sheep have been herded into VUZI with a lot of promotion, news and hype.  Here's a small sampling of some bullish write ups that took place over the summer.

http://sylvacap.com/vuzix-smart-glasses-will-key-component-dhl-global-augmented-reality-program

https://www.thestreet.com/story/13686807/4/these-5-stocks-are-breaking-out.html

http://ceolive.tv/vuzi-virtual-reality-wearables-leader-vuzix-announces-collaboration-agreement/

http://saadvisory.com/update/archive/July-11-2016.htm

As probably should be expected after all that activity, VUZI volumes exploded.  After hardly ever trading 1 million shares in a day during all of 2015, in July that 1 million level was topped on numerous occasions.  And the PPS surged as well, going from in and around $4.50 to up in and around $9 in just a few months.

Maybe this time the herd will be right, but I am one who ascribes to that time tested old bromide that ''the herd is almost always wrong''.  Lots of promotion, news and hype is not unusual when companies are diluting, its hard to sell secondary offerings without something to get the bleacher crowd excited and a rising share price.  

Since the PPS started climbing at the end of June the volumes trading have been huge when compared to more recent norms,  Maybe the level of interest can be sustained, but I don't think so.

We'll see how VUZI performs going forward.