What's up with WATT, Pt II (or "What's making Energous' share price tumble?")

Yesterday I posted on the coverage Energous, the RF wireless power company, receive in the press and how tech journalism really is failing in its role to report on complex tech in a reasonable manner. Today, I'm going to be looking at another metric of performance that we rarely get to see with startups, and that's company valuation, so be warned this is lots of company financials coming up.

Normally a startup is valued by a large scale institutional investor and that determines how much stock the company gives up in return for the investment. It's a bit of black magic, and is related to the technology, IP, customers, team, engineering, but mostly whatever the investor thinks is right for the given cheque size they write and the percent they want. You, as a member of the public, have no idea what goes into this, it simply happens in the background and it's really not clear why they get the valuation they do. 

Things are different with Energous though - unlike almost any other startup they IPO'd early, before product or revenue, and so are a publicly traded company. That means their financials are, by law, available to the public, and as such their company valuation, or market cap, can be viewed at any time. If you assume that the market is rational then that share price, or market cap, is a clear indication of the value of the company. Now, the market can be irrational for long periods of time, particularly with companies with speculative products somewhere in the future, but in the end the rational world forces its way onto the share price, even if that takes years.

I've made it clear that I think that Energous is not as valuable as the market says - that is, I'm saying that in the short term, the market is irrational where Energous is concerned. I briefly wrote about this a few months ago, and I'll summarize here - some people benefit from wildly varying stock prices to buy low and sell high. If you can, legally, insinuate a large company like Apple will use theproducts, while never actually saying it, you can get people to buy the stock speculatively before each major Apple product announcement, then after the inevitable tumble when it's not announced it can be bought back cheap. Rinse, repeat. (Note it doesn't have to be the company itself, or insiders, doing this.)

Here's the stock price for Energous in June 2016. Notice the continual rise until late on the 13th June when it plummets? What could have caused that? Apple held their WWDC event that day, Tim Cook finished his talk at 2pm and there was no announcement of Energous in the iPhone. Dig into this yourself with the NASDAQ tool.

Energous Share Price June 2016

Zooming out to look at the stock price over the last year, it's been a pretty bumpy ride with +/- 30% swings pretty common.

Energous Stock Price over the last 12 months

What's really interesting though is the stock price for Energous over the last 2 months. It could be described as being in 'free fall'. You can see from the chart below that stock has fallen from around $16 to around $10, over a 35% drop. The volume indicators in the bottom show red bars - it's mostly selling.

Energous Share Price over the last 2 months

Most of that happened in the last 2 weeks - let's take a look at the last few days. You can see below that on the 16th the share price was held at exactly $11.00 for the full day, before giving up and it dropping further.

Energous Share Price for the last 5 days

Now, I'll make quite clear at this point that I am not a financial analyst, and I'm putting this out there more to raise questions than to provide answers - so if you know investing well, please jump in and make comment. I'm very interested to hear where I may be wrong on all this!

For the last 50 days the average number of shares sold has been near 300,000, but in the last few days it's been nearer 900,000. This is unlikely to be your average employee selling their stock, these are pretty sizeable share amounts as the total number of outstanding shares is around 22,000,000 - so around 4% of the company every day changing hands. Maybe a vesting period for a large number of employees has hit and they are also allowed to sell, and they're taking their winnings - though not a good sign for the company when the insiders sell as much as they can!

I'm interested in what happened on the 16th, and what held the price at $11.00 for the day. Energous is a very heavily shorted stock - that is, many people betting that the price will go down, not up. Someone perhaps covering their position and making sure they don't get bitten heavily on the downside? Whatever is happening, it's not a 'natural' stock market event.

What's causing this sell-off? I'm actually not sure, as there have been no major events that I am aware of in Energous' world that would drive this. They announced in their earnings call that they'd got more investment from Dialog, that this meant they had $28 million on hand at the start of July, and were trying to drop their burn rate from $15m a quarter to closer to $10m, indicating they can make it to very early next year without further investment. They still claim to have many products in the pipeline with FCC approval underway, of which I remain highly skeptical, however there's nothing here that's different than before.

All I can see having happened is that a few leaks have indicated that the iPhone 8 will not be using Energous, but rather Apple have developed their own version of Qi wireless charging. Should Apple announce this at their WWDC next month, it pretty much puts the last nail in the coffin of anyone thinking Energous will be built into Apple products. Unlike last year, there's not the ability to stoke speculation that 'this will be it' with the next iPhone release. Are people selling off ahead of a potential share-price cliff edge? If anyone has any thoughts, or a better explanation, please do share!

What does this mean for the market cap of the company? A month ago Energous was valued (market cap) at $350m, today it's $225m, over a 35% drop. That's pretty horrendous, and any regular company would have shareholders screaming. Maybe this is just another dip that some will view as a buying opportunity and the Energous roller coaster will carry on, or maybe it's the last dive before iPhone 8 crushes the possibility of Apple revenue and the FCC kills the idea of approval of the large scale transmitters. We'll see.

For the staff, this can be a morale-killer - you see not only the prospect for the product you've been working on diminish, but the $100,000 you thought your stock options would get you is now $65,000. Maybe you'll be getting a Honda not a Tesla? Competition for talented staff is high, and it makes it all the easier for other companies to grab your best employees, or raises your salary/equity costs in keeping them.

This might have implications for other wireless power companies too. uBeam are in the midst of a fundraising round, and from rumors I have heard have been pushing for a monster valuation. Given the iPhone 8 likely making it clear that neither uBeam nor Energous will ever be in an Apple product, and that the market cap of a company that's positioned itself as well as Energous is at $225m and falling like a rock, could uBeam's desired valuation during fundraising be taking another hit?

Update: Monday 21st 2017
The day after I wrote this post was another major down day for Energous, dropping nearly 13% in one day to $8.95, putting the market cap at around $197 million. Volume was increased, around 1,300,000 shares traded, around 6% of shares issued.

Energous Share Price on August 21st 2017

Who is selling this stock? It has to be large scale insiders or institutions, unfortunately it seems the Nasdaq tool only updates institutional positions every quarter, so unless someone can point me to where you can find that information on a daily basis, we'll have to wait and see who is doing the trading here.

SeekingAlpha published another article on Energous, this time claiming that the company may have $4 billion a year revenue within 2 years, based on statements from the CEO Steve Rizzone. This is quite fantastical, with no new evidence presented and assumptions made that are 'generous' to say the least. The article ends with a quote from the CEO:

An opportunity to engage with a company that has tremendous upside at a very very reasonable market cap. If you think about it: if we have no real competition, if our total market opportunity is measured in the billions of devices, if we’re on the cusp of getting regulatory approval - a hurdle which many said would be impossible to get - if we’ve got our first orders for silicon and we’ve got multiple strategic partners that are firmly behind the company, what’s a company like that worth that really starts to execute?

There are five explicit "if"s in that passage and at least a couple more implicit, yet ends with asking the reader to imagine a huge upside, and appealing to their greed. A marvelously constructed paragraph that promises nothing yet leaves the reader with the impression that huge success is imminent. This guy is a great salesman!

The comments to the article are amusing - one commenter, Keubiko, lists nine such statements by Rizzone over the last couple of years, each of the claims of which have failed to materialize. For example:

"we anticipate revenues in the low seven digits in calendar 2015 increasing in 2016 to the mid-seven digit million and reaching monthly cash flow breakeven in the third quarter of 2017." - Rizzone, August 10, 2015

We're now entering the last month of third quarter 2017, breakeven is stated to be (as early as) Q4 2018 here, so over a year away and maintaining Time to Carrot. It's amazing how major product release and breakeven is always just far enough out you don't have to prove product is ready, but not so far that people can't be persuaded to invest because it's just so close...

If you believe I'm wrong about Energous, now is your chance to buy in at a low price, and make me look like a fool. In the short term you may even be right, it's a stock that's had wild swings before - but at some point it won't come back up again. This smells to me like we might be there. Let's keep watching over the next few days.

Further Update on 21st August
This section below was a question I asked about financials that was answered in the comments. Turns out that the automatic importation of numbers from the SEC went wrong, leading to weirdness in the financing tables. I'm leaving it below just as a reminder to myself to always use primary data sources whenever possible.

Finally, and this is definitively a question, I've been trying to work out what this little nugget in Energous' financials is. If you go to Seeking Alpha, and look a the quarterly cash flows, you see this:

Energous Financial Data from Seeking Alpha

The "Miscellaneous Funds" line is interesting as it jumps from $6.1 billion in the red to $1.33 billion in the black in a quarter. What on earth is this? Typo or mishandled data in Seeking Alpha? Or some odd accounting? These numbers are multiple of the company's highest market cap, not chage you find down the back of the sofa. Anyone with information or thoughts, please let me know!

Update: A commentator points out these numbers are due to an issue in automatically reading in the data from the source, which is the SEC and can be found here. Basically, those numbers should be zero, so nothing to see here. He makes a point I should have known - always use primary sources for your data where possible!