Could Audio Pixels be the most misunderstood and mispriced stock opportunity on the market today.

When I was about ten years old (yes the photo is me!), I somehow managed to convince a local business man, (I think my mother helped a lot) that I could build and fit a set of audio speaker boxes for his waiting room.

Music in waiting rooms was a relatively new thing.

No prizes for guessing this was a while back.

In the process of completing my first commercial enterprise, I concede there were a number of manufacturing issues.

Mistakes were made.

Wastage occurred.

There were delays.

Fortunately the project was underwritten by Parents Inc.

Plus being a ten year old entrepreneur and manufacturer brought me a good deal of grown up understanding.

But by the time I had built my third set of speakers, I was a lot better at it.

I was faster, smarter and more efficient.

I’d ironed out the bugs and refined the process.

I knew how to do it and make it work.

While I got out of the speaker business at 12, no doubt to the relief of Bose, the point of this story is that in many ways I believe Audio Pixels (ASX:AKP) is a bit like me when I was 12.

Here’s an outline of my thinking and why we recently bought shares and will do so again when the time is right.

If you don’t know Audio Pixels, the company describes itself as having “patented technologies (that) employ entirely new techniques to generate sound waves directly from a digital audio stream using micro-electromechanical structures (MEMS).”

I would describe Audio Pixels as a company with a revolutionary, alternative technology to the traditional audio speaker.

The technology creates amazingly powerful sound that would normally require big speakers and big boxes but it does it all through tiny computer chips.

Think an old 1960’s cathode ray tube TV in a giant wooden box.

Like the ones rock stars smash with baseball bats in music videos.

Audio Pixels technology is to current speakers as old TV’s are to the thinnest flat screen of today.

This photo from the Audio Pixels website puts the chip size in perspective.

As you can see the chip is pretty small but If you look closely, you’ll see the surface is made up of little dots.

They're the speakers!

Essentially each one is a tiny digital device known as a micro-electromechanical structure (MEMS).

In simple terms, the chip is similar to those in your computer or phone but in this case, some really tiny bits actually move to create sound.

To bastardize a Star Trek expression, “They’re speakers Jim but not as we know them.”

A cross section of one of the 1024 “tiny speakers”

In fact, there are 1024 micro structures (see expanded view of one below) on each chip but the chips can be joined together to form bigger arrays to create more volume. (When manufactured the chips arrive in sheets of 200 and are cut to size required. You can learn more technical stuff here.)

How the Audio Pixel technology actually works is not important when considering the question “Could Audio Pixels be the most misunderstood and stock on the market today?"

It could be, for a number of reasons..

Audio Pixels is seen as a highly speculative tech company.

But I think that’s where some of us might have got it wrong.

Audio pixels isn’t a startup.

It isn’t even an R&D work in progress.

In April 2016, they passed the one trillion cycle test stage on their chips with zero failures.

Here’s a paragraph from the market announcement on that issue, in which I have bolded sections I think worth noting.

“The tests conducted on Phase IV MEMS structures revealed the chip to be perfectly functional when the testing reached the 1-trillion cycle milestone. Both acoustic loss and electromechanical integrity remained stable over the entire test span. “This interim milestone would be equivalent to having the speaker chip play continuously for over 10 years.” said Yuval Cohen, the company’s Chief Technology Officer.

So essentially we have a perfectly functioning chip that has played continuously for the equivalent of ten years.

Lets consider another section of the same announcement by Shay Kaplan, the company’s Chief Scientist.

“This milestone is significant as its confirms to the extent possible, that the design and fabrication refinements undertaken as a result of Phase III, deliver the performance and the reliability sought for our mass production product.”

The key words here are ‘mass production.’

I acknowledge that the phrase “confirms to the extent possible” could be construed as ‘wiggle room’.

But the events since then suggest it was unnecessary and has clouded the real issue.

Without prejudice, I’d have to say that many ASX announcements from Audio Pixels seem to cloud things and in some cases, seem unnecessary.

Take the announcement in November 2016 regarding the final Phase IV mass production/integration stage.

“The company enters this integration phase slightly behind its original forecasted schedule not as a result of any particular setback of material significance; rather as a result of the cumulative effect that relatively trivial activities have on complex, groundbreaking technology development efforts.”

In my mind “It’s really hard doing new cool stuff and it is taking us a bit longer than we thought.” But did they even need to say it?

It went on to add, “For example: the testing conducted revealed the necessity to enhance the integration process capabilities by accommodating a wider span of input voltages. Provisioning the system with expanded voltages involved a relatively trivial circuit design effort, nonetheless the reallocation of engineering resources and associated fabrication time to complete this task, impacted our timelines.”

For a trivial ‘design tweak’ they used 52 words to mention something that hardly anyone would understand and doesn't change the fact that they are entering the ‘manufacturing phase’ of a very cool new product.

Homer Simpson would have just said, “Dooooh” and moved on without mentioning it.

But I got a lot of clarity on Audio Pixels recently when I chatted with non executive Chairman, Fred Bart.

He explained that the concept of digital sound has been around since the 50’s.

But making it work required today’s nanoscale manufacturing, known as fabrication.

“Companies like Intel can afford the $100 million it takes to have a fabrication plant and it might take them ten years to announce a new chip.

“But you never hear of the issues along the way,” he said.

“We made a working chip a long time ago and we’re now at the stage of getting the manufacturing process right and with each batch we’re getting faster and better.”

He said the time it takes to fabricate a new batch of chips has gone from a year to less than three months.

A recent fabrication issue was, according to Bart, “A simple mistake in the manufacturing process and nothing to do with how the chip works.”

“The issue’s been recognised and resolved and the plant has started a new manufacturing run and which should be ready sometime in the first quarter of 2018.

“But we are trying to rectify the current batch by removing the error without damaging the underlying structure

“If we can do that we’ll be able to start inviting potential customers in to listen to the chip in the next couple of weeks,” he said.

Which brings us to the question is Audio Pixels the most misunderstood and therefore the most mispriced stock listed?

You don’t send a chip off to start the fabrication process if it is unclear whether it works.

Nanoscale technology is not easy to work with and like my first speaker order, things go wrong, take longer and sometimes get delayed.

But I got better at it through repeating the process.

We know that the Audio Pixels fabrication process has gone from 12 months to three and barring any human error, demonstration chips will be available very soon.

So I believe that Audio Pixels is far from a startup or even R&D stage business.

It is a late stage disruptive product with massive potential markets and seemingly no competition.

I think it’s has muddied the water with its communications at times but that aside, it looks set to capture some seriously large dollars.

The size of the existing old-school speaker industry is very difficult to value and I have seen suggestions range from 13 to 30 billion a year.

But it could be a lot more than that.

Statistics website Statista says in 2017 there were 209 m connected audio devices and 368 million headphones alone along with 2.3 billion smart-phone users which will rise to 2.8B by 2020.

According to Global Market Insights the smart speaker market alone is expected to grow at a significant pace due to the growing proliferation of smart homes across the globe.

So the potential market for existing technology is huge.

Add to this a new revolutionary technology that’s so small designers don’t have to compromise to fit old technology with its size restrictions and often poor performance.

But what is really cool is Audio pixels only needs to make half a dozen sales to get a giant chunk of the market.

Snag some of the big players that include Amazon, Apple, Google and Harman International or second tier like Sony FABRIQ, Invoxia, Lenovo, LG Electronics, Onkyo, and Sonos.

Sure there are no certainties in life.

But I think on balance from what we about Audio Pixels, I believe it is more than likely to be a big noise in the sound business and a very profitable one.

That’s why our Inside Market private Fund has put its money where its mouth is but of course as we always say “We do not offer financial or investment advice.”