The digital world has taken on a life of its own; just think about online gaming and social media, and their offspring, social gaming. And like organic life, the digital world is evolving. The next stop, one that is already here, albeit in an elementary fashion, is augmented reality, or AR. AR is an extension of earlier virtual reality tech, which created an immersive world for users to interact with – instead of bringing the user into the digital world, AR superimposes digital layers on the physical world.
For now, AR is seen as something of a toy or a gimmick. But the advent of more advanced AI and graphic chips, along with improved displays and touchscreens, bodes well for the tech, and its ability to live up to the promise. Industry analysts estimate that the AR and VR markets together could see a compound annual growth rate of 42% or better by the end of the decade.
In the meantime, plenty of tech companies are getting in early and staking out AR positions right now. From the software to the headsets, AR offers plenty of space for tech companies to establish themselves. We’ve looked up three of them on the TipRanks platform, to find out where they stand in the markets and what Wall Street’s analysts think of them.
Vuzix Corporation (VUZI)
We’ll start with Vuzix, a leader in the area of wearable display technology. Vuzix has several models of AR-capable display glasses on the market, optimized for work or gaming applications. The smart glasses are capable of making 5G connections with AI and AR apps, and use waveguide optics with advanced LED display engines for both indoor and outdoor use. Sometimes, a new tech will put the advance at the users’ fingertips; these glasses put AR at the tip of the user’s nose. Vuzix holds 210 patents in wearable display technology.
Vuzix’s revenues have just begun to show gains, as the technology improves. In 2019, the company saw $6.67 million in total revenues; in 2020, that number increased 73% to $11.58 million. Management described 2020 as a ‘transformational year,’ and noted that demand, in the form of customer orders and reorders, was up strongly. The company reported that the M400 series smart glasses was the leading product for the year.
To accelerate the smart glasses in enterprise-focused solutions, Vuzix in July announced a new Integration Solutions business unit. The unit, a SaaS-based effort, will push software and service subscriptions in support of the smart glasses products.
In his note on Vuzix, BTIG analyst Matt VanVliet writes of the company and its potential, “We believe the applicability and adoption of AR smart glasses has grown exponentially in just the last several months as businesses small and large, consider long-term, modern solutions for labor activities that have been pestered by the consequences of the global pandemic. Hardware and chip technology have evolved from both a cost and technology perspective, and Vuzix is now capable of delivering an affordable, robust and next-generation AR smart glasses experience after years of promise from the industry…. we believe that Vuzix will emerge as the market leader in a nascent next-generation market early in its adoption phase with a long runway for growth.”
In line with these comments, VanVliet rates the stock as a Buy, and his $30 price target implies a one-year upside potential of 102% from current levels. (To watch VanVliet’s track record, click here.)
Elsewhere on Wall Street, there are 2 additional recent reviews on this stock, and they include 1 Buy and Hold, each, all coalescing to a Moderate Buy consensus rating. The shares are selling for $14.86 and their average price target of $30 matches VanVliet’s above. (See Vuzix’s stock analysis at TipRanks.)
Unity Software (U)
Vuzix, above, makes the displays; Unity Software makes the platforms developers need to create the applications. From games to enterprise solutions, Unity’s platforms are leaders for content creators in the real-time 3D space. The range of applications is wide, encompassing architects and auto designers to game and film makers. Unity gives its customers comprehensive software tools to create, run, and monetize their content on PCs, tablets, smartphones, gaming consoles – and AR devices.
Unity is one of the tech world’s unicorns, a billion-dollar company that made a splash with its IPO. The offering, held last September, saw the company put 25 million shares on the market, with initial pricing at $52 each, well above the expected $44 to $48 range. The stock closed on its first day of trading at more than $68, and the offering raised over $1.3 billion for Unity. Since then – despite pulling back during 2021 – U shares are up 59%, and the company boasts a $30 billion market cap.
On July 22, Unity announced that it had acquired its long-time partner Interactive Data Visualization in a deal with undisclosed financial terms. IDV is the creator of SpeedTree, a software product for creating vegetation and environmental modeling in games and simulations. SpeedTree now will become a more deeply integrated part of Unity’s software platforms.
Brent Bracelin, the #3 analyst overall in the TipRanks database, sees Unity in a solid position leading its industry. He writes, “Data-driven analysis of advertising SDK trends suggests that Unity has seen a noticeable increase in ad market share post-IDFA privacy measures implemented in April…. Recall, the initial IDFA impact was sized as a potential $30M headwind. U remains a generational platform powering real-time 3D digital experiences in gaming and beyond with multi-billion revenue potential….”
Bracelin goes on to note that Unity’s products are in high demand – by companies with serious economic clout: “Our data-driven analysis of job postings this quarter suggests that Apple, Facebook, and Walmart are hiring Unity 3D developers to create new AR/VR applications. New Unity 3D developers openings within gaming including: Warner Brothers that is building a new Game of Thrones application, Niantic Labs (PokemonGo) is building a new mobile application, and Blizzard is hiring to shape the future of Azeroth in World of Warcraft.”
With those comments in the background, it’s no surprise that Bracelin rates U shares as Overweight (i.e., a Buy), with a $150 price target suggesting a one-year upside of 38%. (To watch Bracelin’s track record, click here.)
Wall Street is bullish on Unity, as is clear from the Strong Buy consensus rating. This is derived from 8 reviews, that break down 6 to 2 in favor of Buy over Hold. U shares are selling for $108.75 and have an average price target of $122.57, which implies an upside of 12% for the next 12 months. (See Unity’s stock analysis at TipRanks.)
Facebook (FB)
We’ll wrap up with Facebook. The social media giant is also an innovator in AR, and was an early adopter among tech companies when it acquired Oculus VR in 2014. That transaction cost FB $2 billion, and first showed results in 2016 when the company launched a VR headset for the consumer PC market.
Since then, Facebook has worked on expanding and improving its VR/AR headsets and applications. Noting that existing systems required high-end PCs or smartphones, which effectively put a limit on the customer base, Facebook has been working on stand-along headsets. In 2017, the company introduced Oculus Go; in 2019, the Oculus Quest; and in 2020, the Oculus Quest 2. In the fourth quarter of 2020, Facebook sold 1.1 million Quest 2 headsets, giving it a commanding lead in market share – its closest competitor in this field, Sony, shipped out only 125,000 equivalent headsets.
So, Facebook is off to a running start in the AR headset market. But it’s important to remember here that these headsets, impressive as they are, make up just a small fraction of FB’s revenue. FB brought it $7.5 billion in total sales from 3Q20 to 1Q21, and 98% of that total came from its core ad revenue. Facebook’s ‘other’ revenue segment, which includes the Oculus headsets, totaled $1.8 billion in 2020, up 72% yoy.
The company is not just sitting back and enjoying the proceeds, however. FB has an active development program, and is teaming up with Ray-Ban to create a set of AR smart glasses. The project is billed by FB founder Mark Zuckerberg as part of a ‘metaverse’ that will combine both AR and VR experiences in shareable social media.
5-star analyst Mark Mahaney, writing for Evercore ISI, notes Facebook’s strong performance in the VR headset area and explores what that could mean for the company. In Mahaney’s words, “…Oculus Quest 2 [is] on track to sell 8MM+ units in its 1st year. VR may well be stepping into the mainstream. Also, we believe investors may underappreciate the magnitude of FB’s VR investments, which we estimate to be in the neighborhood of $6B. The financial and stock implications of this estimate are that FB’s core ads business may be more profitable than realized (perhaps 43% Operating Margins), that FB’s core valuation may be more attractive than realized (adjusted 18X P/E – a discount to the market), and that FB shares may warrant a re-rating.”
Mahaney doesn’t pull his punches on the rating. He sets a price target of $400, although this year’s share gains have reduced the upside here to 11%. He rates the stock as Outperform (a Buy). (To watch Mahaney’s track record, click here.)
There are no fewer than 24 ratings on file for Facebook shares, indicative of the interest Wall Street takes in mega-cap companies. These include 20 Buys, 3 Holds, and 1 Sell, for a Strong Buy consensus. FB shares have an average price target of $414.57, suggesting upside of 15% from current levels. (See Facebook’s stock analysis at TipRanks.)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
