Why I Can't Recommend Microvision

One of the great maxims of traders and Wall Street pros is to follow the "smart money."

I'm not much for the thesis that institutional shoppers tend to make smarter investing decisions, but many of you who've read my ruminations on insider buying say you'd also like to know how the Big Money is betting. Your wish is my command.

Next up: Microvision (Nasdaq: MVIS). Are institutions bullish or bearish when it comes to this maker of imaging and projection technology?

Foolish facts

Data current as of May 30.

Want to broadcast a presentation from your iPhone? You can, thanks to Microvision. The company's PicoP chip technology mixes lasers and other components to accurately render complex visuals and videos in a portable form factor.

Microvision calls PicoP a "display engine" because of how it deconstructs images into electronic signals that are then fed into tiny red, green, and blue lasers that transmit image piece-parts through an optical concentrator and then a scanning mirror to reproduce images a pixel at a time. Microvision says is the process is based on patented expertise.

Right now, the SHOWWX family pico projectors accounts for the majority of the company's product revenue. (North of 90% in the latest quarter, according to SEC filings.) SHOWWX projectors can be either embedded in a portable device, or as shown below, connected to any one of Apple's (Nasdaq: AAPL) iOS devices. Here's a closer look at how they work:

Seems pretty cool, right? Sure. And yet as much as I like the idea of portable projection, I doubt I'd rush to spend $200 on the SHOWWX device. And that's a problem -- the $199 advertised price at Amazon.com is $150 off the list price. Microvision is discounting to get its technology in front of users in the hopes they'll convince manufacturers such as Apple to embed PicoP in their devices. Shareholders are footing the bill through dilution.

"Based on our current operating plan, we anticipate that we have sufficient cash and cash equivalents to fund our operations through August 2011. We will require additional cash to fund our operating plan past that time," the company said in its first-quarter 10-Q report, filed earlier this month with the Securities and Exchange Commission. [Emphasis mine.]

Around the same time, Microvision entered into an agreement with the Azimuth Opportunity fund to secure as much as $40 million in new equity financing. Exactly how much the deal will dilute existing investors isn't yet clear, but the company has more than doubled its shares outstanding since 2006, according to Capital IQ.

Institutional ownership history

Source: Capital IQ, a division of Standard & Poor's.
*Indicates the number of shares owned.

Dilution may help to explain why Fools have mixed feelings about Microvision. The 470 CAPS investors who've rated the stock give it just three out of five stars. Institutions may be more committed; none of the top five holding shares has sold since the end of last year.

But that also might not be saying much. At $131 million, Microvision's market cap doesn't exactly shout "liquidity." So even if there is pent-up interest in diversifying -- I'm speculating, since we don't know for sure -- there probably isn't enough demand on the "buy" side of the equation. Selling pressure has driven the stock down by more than 32% year to date.

Competitor and peer checkup

Source: Capital IQ. Data current as of May 30.

This table expresses both the best and worst parts of the Microvision stock story. On the one hand, institutions own so little of the shares outstanding that any significant increase in Big Money interest could send the stock soaring.

On the other, Microvision has run a cash-consuming business since at least 1996. Back then, the company burned through just $2.6 million in order to keep the lights on. Today, Microvision burns through more than $40 million in operating cash flow annually -- or more than twice $16 million in revenue it generated during 2002, the best sales performance in company history.

As a member of the Motley Fool Rule Breakers team I'm always interested in breakthrough technology ideas. But I'm also a student of history. Here, history says Microvision's best bet is to find a suitor willing to pay a premium for its patents and technology. Could it happen? Sure, but the possibility of a buyout isn't a good enough reason to buy.

Now it's your turn to weigh in. Let me know you would rate Microvision using the comments box below. You can also recommend other stocks for me to evaluate by sending me an email, or replying to me on Twitter.

Or, if you're on the hunt for more stock ideas, I recommend taking a minute to watch this free video right now. You'll walk away with a richer understanding of how the Next Big Tech Revolution -- cloud computing -- is changing everything, and creating opportunities for investors in the process.