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Pixelworks Announces a Bit of Magic, But There's a Reason to Be Careful

Pixelworks Announces a Bit of Magic, But There's a Reason to Be Careful

Here's the way I'd play this pop in the stock after the Disney announcement.
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Here's the way I'd play this pop in the stock after the Disney announcement.

Big news!

Former Stocks Under $10 portfolio holding Pixelworks  (PXLW) , which is a name that the portfolio both made and lost money on over two separate time periods, has apparently reached a multi-year agreement with The Walt Disney Company  (DIS)  to bring a collection of "TrueCut Motion" grade titles to select home entertainment devices.

TrueCut Motion technology provides filmmakers with motion grading tools that enable a new look for storytelling and makes corrections to some motion anomalies that can plague high-end, high-contrast, brightly lit display screens on consumer electronics. This technology ensures that the corrections are then mastered into the source material, resulting in an unparalleled level of quality in the motion picture.

Just Be Careful

Shares of Pixelworks are trading at around $2.17 Tuesday. That's a 46% pop from where they closed on Monday.

This seems like a low-risk play given that the stock trades with a low $2 handle. Understand that financial terms of this deal have not been announced. Either that or I do not see them. 

Pixelworks is expected to report earnings for the fourth quarter and fiscal 2023 next week. Expectations for Q4 are for an adjusted loss of $0.04 per share, or a GAAP loss of $0.06, on revenue of $20M. 

A $20M print for revenue growth would be good for 18% year-over-year growth, which is nice, but the company has hit that level in a quarter before... in 2018 and a near-miss in Q2 2022. The level has never held. 

Pixelworks has also posted a net loss for 17 consecutive quarters and filed back in November a prospectus to offer as many as 25M new shares from time to time as the company and the markets evolve. 

My feeling is that if the shares see enough of a pop on this Disney news that the company may try to use the higher price to raise capital and thus dilute the equity.

The Balance Sheet Is OK

Pixelworks is not heavily indebted, so that is not a factor. 

As of the September quarter, the company had $50.3M in cash on the books and current assets of $68.7M. It had no debt, short or long-term on the balance sheet, as it's have been able to use a Chinese subsidiary as something of a cash cow over the years. 

The current ratio comes to a robust 4.7. Now you see why I was involved with this name. With inventories of just $5.9M, the quick ratio works out to 4.3.

My Thoughts

1-30-24-PXLW

Readers can see in the chart above that PXLW shares had recently broken out of an almost three-year tailspin. The stock has taken back its 50-day, and 200-day simple moving averages -- and now this. 

It's not that I don't think Pixelworks can build on this Disney news. They can, and they have wisely managed the balance sheet. 

My thinking is that if a reader wanted to speculate on a name like this... wait. Give it a little time and see if they try to sell new shares. I am interested myself. I just don't want to get picked off by the company at the top. Let the day-traders take their profits first.

At the time of publication, Guilfoyle was long DIS equity.