Vuzix Deep Dive $VUZI
Is AR the future?
Key Stats
Intro
AR/VR differences
Why AR? What are the use cases?
Business
Moat
Opportunity
Financials
Management
Risks
Conclusion
1. Key Stats
Market Cap: $1.14B
Share Price: $19.72 USD
Current PS ratio of 98.43
Not yet profitable
Intel own roughly 10% of the common stock
Management own roughly 10% of the common stock
ARK forecasts AR industry to scale from $1B today to $130B by 2030
2. Intro
Immersive technology is a technology area I love writing about. My professional background is within the industry and I think it’s one of the sub-sectors of the overall digital economy that is beginning to demonstrate what it has to offer.
Even in the past year we’ve seen a rapid uptick in adoption of the technology – even if it’s currently in an experimental form. Big businesses are continuing to invest huge sums of money into immersive technology. For example, Facebook have been heavily investing into the Oculus line of products over the past year with great success. They have signaled their intent to bet on the future of AR, with plans to release a set of AR glasses in the near future. These activities fall under the umbrella of Facebook Reality Labs.
Microsoft have been on a similar path, though focusing more on their Hololens hardware and Mesh Software. To sum it up, Facebook seems to be focusing on VR/AR gaming/fun/social experiences, whereas Microsoft are focusing on AR for business & enterprise. Both will be valuable.
Alongside these two giants pioneering the way, there are a tonne of other hardware/software players who are paving the way for innovation within this field - Snapchat being one of many.
3. Differences between AR and VR
Many of you will be familiar with the distinguishing factors between AR and VR. If so, feel free to skip this part.
VR (virtual reality) is a fully immersive experience whereby you put on a headset completely replacing your surroundings with new surroundings. In this environment you cannot see the outside world and typically use two controllers to track your right and left hands.
Development within this technology has allowed us to move from a VR headset needing to be plugged into a powerful gaming PC in order to run, to an elegant portable device where you can simply pick up and play (Oculus Quest).
AR (Augmented reality), although sounding similar, is vastly different. Where virtual reality replaces your vision, augmented reality adds to it. Imagine wearing a normal pair of glasses/sunglasses where you can still see the world around you, but with an added ‘digital layer’ which is able to respond dynamically to the world around you. Currently, Augmented Reality is being used by many different companies, but an easy one to get your head around and understand is Snapchat. The company have their ‘lenses’ which, at a basic level, use simple overlays to add complexities to the image.
Whilst AR and VR are vastly different in terms of use-cases and TRL (technology readiness level), we group them under the same category - ‘immersive wearable technology’ which has the aim to enrich our lives in one way or another.
4. Why AR? And what are the use cases?
This is the most interesting part in my opinion.
A great deal of technological development has gotten us to the current point with both VR and AR. A great person to follow and watch speak on this subject is John Carmack – he was the CTO of Oculus until recently and is considered the godfather of virtual reality gaming.
John Carmack (2012) - “one of the interesting things about VR is that it is a long chain. You’ve got sensor and communicators and simulation and rendering and output and display and optics. And we’ve got the middle part of that in games, but we need to add to beginning and end of that chain. Like any chain, it’s only as strong as its weakest link – if you do a bad job on any part of it, it’s not going to come out with the experience you want.”
The point John makes here is that we have many of the technological elements making up the chain of parts that is a AR/VR headset. However, if one aspect of the technology isn’t where it needs to be, then the end product simply isn’t compelling enough to be a commercial success.
This is part of the reason why AR/VR have been around for so long. The idea was around in the early 20th Century, however almost none of the technological advancements were in place to be able to make the idea come to life. Even in 2012 it was a struggle to find a VR/AR product to tick all the boxes.
The reason VR is finally beginning to go mainstream (whilst AR is still seemingly clunky and experimental) is that the VR form factor is finally portable, comfortable, of high enough quality and affordable. This has only just been achieved, and is made possible by a smartphone-sized device which powers the headset. The problem with AR is that is needs a much sleeker form factor requiring a smaller and equally powerful, well, everything. Until the technological hardware can get to this point, AR will continue to lag VR. We are still several years off.
The applications
The devices themselves are relatively pointless unless we are able to use them to make our lives better in some way. Augmented Reality has many different use cases. I’ll list a few here…
In the $VUZI investor presentation they list 4 main use-cases; warehouse logistics, manufacturing, tele-medicine and field service – with specific examples in medicine including…
Open Heart Surgery at the Chi-Mei Medical Center in Taiwan
Knee Surgery by Pixee Medical
Gastronomical surgeries on patients at leading hospitals based in Barcelona
and many more…
*Warning - the video below is a bit gory*
However, I believe there are other compelling use-cases if we are being imaginative.
Crime-scene-investigation
Could AR glasses be given to the police force as standard kit so that officers nearest to the scene of a crime can inspect the scene whilst simultaneously beaming back a live feed scan of the room HQ using 5G?
Team collaboration
It’s highly likely we will see Microsoft utilising their ‘Teams’ platform so that remote teams can feel more connected as they will be able to collaborate remotely.
Training/learning
Similar to VR, we could use AR for gaining knowledge in a new way. For example, if you were trying to learn a new language, you could have AR glasses recognising objects and overlaying a useful word or phrase in that particular language. Maybe it could even translate what someone else is saying in real time and display the text back on the screen of your glasses.
The possibilities are endless… And with the development of other enabling technologies such as 5G we are likely to see a whole host of new ideas pop up over the next several years.
Prosumer
“We also believe that augmentation of the real world with cloud-based information will change the future of computing and will result in broad adoption of AR smart glasses. This capability will allow smart phone users to be able to keep their phones in their pocket and at the same time still receive location-aware content overlaid with their real-world view. For example, while a user walks down the street, they could get directions and a Yelp score for the restaurant they are looking at or they could chase Pokemon Go game characters as if they were actually in the real world; all within the view of their smart glasses while leaving the phone in their pocket.”`
5. Vuzix Business
Background
Founded in 1997 with the IPO in 2009, Vuzix have been around for a while and are an established leader in wearable computing, AR, optics and display engines.
Products
The company are engaged in the design, manufacture, marketing and sale of augmented reality wearable display and computing devices, also referred to as head mounted displays (or HMDs), in the form of Smart Glasses and Augmented Reality (AR) glasses.
At the time of writing, the company create 3 main types of product with a new one on the way in the near future (Next Gen). The basic functionality of these glasses enable the user to view, record, stream and interact with digital content, all completely hands free.
M300XL, M400 and M4000 Smart Glasses (M series)
Vuzix Blade® Smart Glasses
Other AR Products
The Smart Glasses and AR glasses are designed for all-day use cases and are small enough to fit in a user’s pocket or purse.
Up to this point the glasses have been somewhat clunky in form (see the below pic), however as you can see from the video attached – the Next Gen model looks to have improved by an order of magnitude in both the display technology and the form factor. If this is truly as game-changing as it is made out, the new product could be a catalyst for the company to reach new heights in the coming years.
Clients
The existing enterprise customer base has a broad global footprint and includes some of the largest companies in the world in their respective industries ranging from logistics and distribution to medical technology and biomedical, retail, manufacturing, clean energy, and mining. Many companies, particularly public U.S. firms, are not ready to publicize their use of Vuzix’s smart glasses just yet.
“We have fields of customer seeds planted, and a growing number are starting to yield orders ranging from dozens to repeat orders in the hundreds of units. With the world coming back to work, we're fielding inbound from some customers that are looking to scale rollouts that are in the many thousands of units.”
Competition
There are many players emerging within the Augmented Reality sector. Most of the main competitors include large companies such as Apple, Google, Facebook and Snapchat – all large companies with deep pockets, innovating aggressively.
Competing against these cash rich companies will prove to be a challenge for Vuzix moving forwards as their future success will somewhat depend on how effectively the company can continue to develop AR/VR hardware + software in comparison to the big players.
The advantage for Vuzix is that they have been doing this for over 20 years and are an established player in the industry with a strong and growing customer base alongside specific enterprise niches (healthcare/construction/engineering etc.).
“We compete against both direct view display technology in smart phones and tablets and wearable display technology. We believe that the principal competitive factors in the personal display industry include image size, image quality, image resolution, power efficiency, manufacturing cost, weight and dimension, feature implementation, AR capabilities, ergonomics, style, hands free capabilities and, finally, the interactive capabilities of the overall display system.”
Some examples of categories Vuzix are cometing in include:
Binocular wearable display products
“Carl Zeiss, Seiko Epson (Epson), Sony Corporation, Microsoft Corporation, Avegant Corp., Osterhout Design Group (ODG), Oculus/Facebook, HTC Corporation, Razer Inc. and many others. Many of these firms have discontinued their efforts while others have introduced VR viewers themselves such as HTC, HP and Lenovo. We believe these competitive products have received limited customer acceptance due to their being bulky and having non-user-friendly designs.”
AR glasses
“Microsoft Corporation, Meta, Sony Corporation, Epson, Atheer, Inc., DAQRI, Magic Leap, ODG, Nreal and CastAR. Today many of these products are fairly bulky and tethered to an external controller. Many are being sold as AR Smart Glasses and are currently targeted at enterprise and academic researchers. The most complete and functional systems today are the Microsoft Hololens II and the Magic Leap One, both of which cost $2,295 - $3,500 per unit.”
Monocular smart glasses and wearable display products
“Liteye Systems, Inc., Lumus, Shimadzu Corporation, Sony Corporation, Kopin Corporation, Zebra Technologies, Creative Display Systems, Brother, Google, Garmin, BAE Systems, Six-15 Technologies, LLC, Lenovo, Optinvent, RealWear, Focals by North, and Rockwell Collins.”
Waveguides and display engines
“There are a limited number of manufacturers of waveguide optics, all targeted at OEM producers of AR and smart glasses. Competitors to our waveguide products include Lumus, WaveOptics, Digilens, Optinvent and several others”
6. MOAT
Strong customer base
Established brand
Strong functionality
SaaS model with integrated app store
IP portfolio spanning 22 years
Including 88 issued patents and 96 pending
7 registered US trademarks + 53 trademark registrations worldwide
One of the main ‘value-adds’ in the $VUZI business model is the combination of functionality alongside wearability. In order for the product to have mass appeal, it needs to be compatible with leading applications like zoom and skype, whilst also offering day-to-day functionality allowing the product to be used 8+ hours every day.
The ability to execute on these two fronts in an important factor in the continued success of the company. In addition, the Vuzix app store is an underrated element to the business which operates more like a SaaS company (screenshot below). This app store’ will likely add a recurring revenue stream to the company which will be a welcome addition for shareholders.
5. Market Opportunity
Grand View Research estimate AR market size to be $17.67 billion in 2020, expanding at a CAGR of 43.8% to 2028 to reach a value of $323 billion.
Mordor Intelligence estimate AR market size in 2020 of $1.98 billion, with a CAGR between 2021 and 2026 of 151.93% to achieve $506 billion by 2026
Fortune business insights estimate AR market size in 2019 of $2.82 billion with a projected CAGR of 48.3%, taking the 2027 value to $65.22 billion by 2027
“We believe that key growth areas for us are the enterprise, medical, consumer electronics, OEM, defence and security markets. We are addressing most of these markets by developing and selling our own finished products and building a growing eco-system of software and services internally and with our value added resellers, or VARs, developers and end customers. Another potential channel to these markets we are developing includes supplying mass production of waveguide optics and display engines to select third parties to use in their products.”
The business for the last five years has focused on enterprise and industrial markets and high-end (prosumer) mobile consumer markets. The demand for head-worn displays in these markets is being driven by such factors and expectations as:
An increasing number of “ready to go” hands-free enterprise, commercial and medical applications for which the products are well suited;
Increasing demand for Internet, social media and cloud services’ access “anywhere, anytime”;
More users migrating a greater portion of their entertainment and information gathering time to mobile devices; and
The growing use of AR/XR applications that will drive the need for head-worn display solutions to replace the need to hold up handheld devices to use the applications.
As a result, the near-eye display technologies can significantly increase user satisfaction and allow for widespread AR adoption and applications.
Financials
Revenues
Beat revenue expectations: 74% y/y growth to reach $11.6M
Due to higher sales of both smart glasses and engineering services (+68% and +123% respectively)
The sale of smart glasses and the sale of engineering services represent the majority of Vuzix’s revenue generated, with large gains in each due to increased demand y/y.
Profitability
Beat EPS estimates by 18% to achieve -$0.09
Margins low, but anticipating improvement over time with scale.
Cost of goods sold remain high as proportion of sales (83%)
Overall decrease in COGS driven by 72% decrease in Inventory reserve due to dropping some product lines.
R&D expenses decreased from $8.9M in 2019 to $7.6M in 2020
Mainly driven by decrease in external consulting fees related to the M400's development and Vuzix Blade software enhancements.
Outlook
"We are well-positioned to achieve significant year-over-year comparative revenue growth in our first quarter and throughout 2021, thanks to the growing success of our M-Series and Vuzix Blade Smart Glasses across key market verticals that include healthcare, field service, manufacturing and warehouse and logistics, as well as expected contributions from our OEM business group," said Mr. Travers. "Further, as competitive as our current family of smart glasses are, we intend to reset the industry bar for performance and wearability as we complete the development and announce the launch of our next generation smart glasses over the balance of this year. Due to significant warrant exercises since December 2020, our revenue growth and product development objectives this year will be fortified by the strongest balance sheet in our company's history."
Balance sheet
$45M in current assets with 36 M in cash on balance sheet
Decreasing debt levels
Extremely strong balance sheet – therefore well positioned to be able to invest in the growth of the company over the coming years.
Valuation
Vuzix are trading at a very high multiple considering other similar players in the industry (accurate number is 98x). I would argue however, Vuzix are in a leading position and therefore best placed to capitalize on the coming boom in AR. From the graph below, I have picked a basket of companies and compared their PS ratios over time. Vuzix looks expensive in comparison, however all of the other companies have other aspects to their business. The company most similarly resembling Vuzix here are Snapchat who have a similarly high ratio.
Overall, yes, the valuation is lofty here – however we are somewhat factoring in future growth. With an industry expected to grow at huge rates over the next decade, this high multiple seems somewhat justified. Tread carefully.
Management
Vuzix is founder led.
“Paul Travers was the founder of Vuzix and has served as our President and Chief Executive Officer since 1997 and as a member of our board of directors since November 1997.”
They have an experienced and capable executive team. You can see the full list of board members here.[RG3]
Risks
Fierce competition
Vuzix face a serious amount of competition, not just from the big players like Microsoft, Facebook, Google + Snapchat. There are plenty of other players making moves in the AR space.
Vuzix do have significant and resilient competitive advantages (See section on Moat)
Reduction in R&D is not a good indicator of willingness to invest in growth.
However the company are in a good cash position, so I would hope to see some sort of increase in R&D over the coming years.
When will AR take off?
Current projections are that AR still have several years before the hardware is ready for mass consumer use. When this happens, the envisaged use-cases will likely lead to a huge TAM. No-one will be able to accurately predict how many years we need to wait for this.
Conclusion
Overall, Vuzix are a very interesting company and one that I will be keeping a close eye on over the coming years. There are many factors working in their favor, making it likely they will be able to succeed in the soon-to-explode AR sector. These factors include…mong one of the most competitive AR companies in the world.
Global brand continues to expand across enterprise, healthcare and OEM customers
Revenues growing
Critical IP in the key AR smart glasses areas of waveguides, small projection engines, holograms, and MicroLED displays
Healthy cash position to enable increased R&D and scale
Large and growing TAM
Proven to be able to execute
Strong leadership
I think the success of Vuzix will largely depend on whether they can carve out enough of a niche within the overall AR category and whether they can keep up with the pace of development of the giants like Facebook, Microsoft, Google etc.
This is an extremely competitive industry, and it’s only just beginning to heat up. I’m very excited to see how this whole situation evolves over the coming decade, and I think Vuzix has the potential to be a big part of that.
Cheers,
Innovestor