The little known [Cayman] company that manufactures Google Glass: Foxconn
Google Glass was released to the press a few days ago and reviews are flocking in. Investors are trying to make sense of the new product, and what its influence will be on Google Inc’s (GOOG) share price.
Writers who have more knowledge about gadgets and technology than I will make forecasts: How many of these units will actually sell? How will consumers respond to this new piece of technology? If it does, when will the Google Glass gadget develop into something with mass market appeal?
In the meantime I want to take a look at the possible consequences for another link in the supply chain. Which company is manufacturing the $1500 electronic? Surely, there is an unknown company somewhere that has been contracted by Google to put this novelty piece together…
It turns out that the partner which Google chose for this project is Foxconn (FXCNY.PK), aka, Foxconn International Holdings Limited. This Taiwan based manufacturer, which also turns out a lot of products by Apple (AAPL), like the iPod, iPad and iPhone but also other technology staples for Apple’s competitors. To name a few: The Amazon Kindle, Sony Playstation 3 and Nintendo’s Wii U.
Foxconn owns plants all over the world, with a major part of their capacity located in China and Taiwan. However, Google Glass will be manufactured in the United States. Foxconn has a plant in California, not too far from the Google headquarters, which reportedly was a criteria Google was looking for. Changes are that if the product is a huge success, the production will be moved back overseas.
Foxconn and Hon Hai Precision Manufacturing
In the press you may encounter the company’s trading name Foxconn and the Taiwan based ultimate holding company used interchangeably.
The Company was incorporated in the Cayman Islands as an exempted company with limited liability on 8 February 2000 under the Companies Law of the Cayman Islands.
The Company’s shares have been listed on the Main Board of The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) since 3 February 2005.
The Company’s parent company is Foxconn (Far East) Limited (incorporated in the Cayman Islands) and its ultimate holding company is Hon Hai Precision Industry Co. Ltd. (“Hon Hai”) (incorporated in Taiwan and its shares are listed on the Taiwan Stock Exchange Corporation).
– Foxconn annual report 2012
Upsides of Google Glass for Foxconn
Let’s take a look at the possible upsides for Foxconn that come with the production of Google Glass:
Foxconn will be less reliant on Apple, which currently accounts for 40%-60% of their revenue (estimates cover a wide range but it’s always a number that does not look healthy).
This prestige project puts Foxconn in a positive light. Although as a manufacturer of the high-end iPad, iPhone, iPod, Kindle, Playstation and Wii U devices, it’s hard to question their ability to put quality products together. However, it could take some attention away from the bad press concerning their treatment of workers.
If Google Glass becomes a huge success Foxconn will be well positioned to profit along with the American tech giant. When Google needs maximum capacity to meet great demand, margins will likely be excellent on a relatively expensive product.
Downside / Risks
In 2013 the gadget is unlikely to get mass produced. Currently, it’s expected that the gadget will only be released to the public in 2014.
Foxconn is involved in several controversies about the way they treat their workers. A high profile product like Google Glass might increase scrutiny of their business practices.
Valuation
Foxconn’s financial results have been less then stellar over the last couple of years. Book value has been decreasing even though the company regularly invests in companies or makes acquisitions. Examples of investments are Sharp and Woodman Labs in 2012.
In 2012 and 2010 they posted a net loss and in 2011 and 2009 they posted only small profits. Having said that: If we go back to 2006 and 2007 they posted stellar profit numbers. If they would be able to go anywhere near those numbers again, they are a very good buy at the current price of $7.9.
Year 2009 2010 2011 2012
EPS in USD 0.11 -0.61 0.20 -0.87
Free Cash Flow 540 -385 297 560
Liabilities – 2424 1853 1562
Recent financials in millions except EPS
The market is not convinced the future looks very bright for Foxconn. Even though they report a book value of $9.65, the shares have been trading significantly below that, moving in the opposite direction of the S&P 500.
Slowing Apple sales play a role in the decline; if Apple surprises with new products soon, that could reverse this trend. For example, Apple TV could be a product improving sales to more profitable levels if Foxconn were contracted to manufacture this product.
Google’s business could result in a better diversified client portfolio for Foxconn and that’s certainly something the company needs. Unfortunately, at this time I expect earnings from Google Glass to remain of little material impact on their bottom line for at least another 12 months. If this order is an indication of future business from Google remains to be seen.
With the stock trading at $7.9 and earnings declining, the company appears to be fairly valued. However if you are a believer in Google Glass or perhaps in Apple releasing groundbreaking new products in 2013 this is a company well positioned to profit. If it’s business as usual, the company grinds out a small profit/loss. If surprise breakthrough technology is released by Google or Apple, Hon Hai could benefit greatly by being an important partner in the supply chain.
Foxconn is a High Risk Opportunity
There are many uncertainties surrounding Foxconn. They get a lot of bad press for their worker treatment. Clients do not want this reputation to rub off on their brands. Sources report they are addressing this issue. The company’s financial results have been very good in the distant past. Over the last few years they have been less than desirable.
Having said that: Google is having them manufacture their flagship device. Which is a vote of confidence in their capabilities to manufacture novel devices. In addition, the economy in both the USA and Europe has been terrible over the past few years, which hurt demand for the discretionary products they manufacture.
I view this as a high risk opportunity to acquire stock of a company that has desirable manufacturing capabilities and competitive execution. Certainly not a no-brainer, but in my view it’s a bet with asymmetrical returns in the buyer’s favor.
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