Welcome to The Matrix: VR/AR/MR Has Reached The Tipping Point

As the character Morpheus in The Matrix movies might put it: “What if I told you… that virtual, augmented and mixed reality can make you rich?”

In a technology industry known for jargon, VR/AR/MR is among the most frequently cited acronyms today. It’s one of the most disruptive innovations to emerge since the advent of the Internet, as well as one of the hottest moneymakers you’ll ever find. Below, I highlight the latest developments and optimal investment plays.

Many readers lately have been asking me about the right sectors into which they should rotate. Three sectors that enjoy strong tailwinds are aerospace/defense, construction, and technology. Technology is particularly enticing as economies strengthen, smartphone use explodes, and corporations dig into their huge cash hoards to make long-deferred IT investments. The benchmark Technology Select Sector SPDR ETF (NYSE: XLK) is up more than 15% so far this year, compared to about 7% for the S&P 500.

The most promising subset of the tech sector is VR/AR/MR, which is upending the social, business and investment status quo at a faster clip than even the tech world’s visionaries thought possible.

We’re living in what the legendary management guru Peter Drucker called the era of three C’s — accelerated change, overwhelming complexity and tremendous competition. The emergence of VR/AR/MR reflects this dynamic.

Trying to keep it real…

When depicting the possibilities of VR/AR/MR, Hollywood has been characteristically prophetic.

First, let’s clarify our definitions. Virtual reality refers to computer-simulated reality that’s an immersive experience. Think video games.

Augmented reality is a real-time view of an actual physical environment whose elements are supplemented by computer-generated sensory input such as sound, video or graphics. AR increasingly entails enterprise applications for practical commercial uses.

Mixed realty is the blending of virtual and augmented worlds to produce new visual environments in which physical and digital objects co-exist and interact in real time. In this hybrid environment, synthetic content interacts with the real world, akin to the police monitors in the movie Minority Report.

I’ve previously written about VR/AR/MR, most recently in the April 27 issue. It’s one of the most frequent topics of reader letters. The exciting (and nerve-wracking) aspect of covering a fast-moving technology such as VR/AR/MR is trying to pinpoint the leading companies ahead of the investment herd, before their share prices get too expensive. But if you jump in early enough, you can realize exponential gains.

In a recent report, Bank of America/Merrill Lynch Global Research predicts that VR/AR/MR is on track to have 300 million users by the early 2020s, with the potential to capture two-thirds of our leisure time and 50% of our leisure spending.

The technology is dramatically transforming nearly every industry, including manufacturing, engineering, architecture, medicine, education, media, communications, gaming, entertainment, the military, and retail. The Bank of America/Merrill Lynch report asserts that VR/AR/MR is fostering a spatial computing revolution that integrates disruptive technologies such as sensors, Big Data, the cloud, artificial intelligence, and wearables. According to the report:

“The eventual convergence of AR and VR devices could push the nascent market to become the “form factor” for nextgen computing as a universal, smart, and intuitive interface for the Internet of Things (IoT) ecosystem. It could be the one device to disrupt and rule the world of technology — bridging the digital and physical worlds for the 3.5 billion Internet users, 3.6 billion mobile broadband users, and 1.6 billion with TVs globally.”

I have seen the future, and it works…

A wide variety of head-mounted VR/AR devices have hit the markets in the last 12-18 months. Among the top wearable products specifically highlighted by BofA/Merrill Lynch is the M100, manufactured by Vuzix (NSDQ: VUZI).

With a market cap of $120.4 million, Vuzix is a U.S.-based pioneer in the development of AR for business and enterprise purposes. Vuzix M100 Smart Glasses are an Android-based wearable computer with several pre-installed aps, enhanced with an onboard processor, recording features and wireless connectivity. The M100 is designed for a wide variety of business-related functions. The company also makes an upgraded and enhanced version called the M300.

The analyst consensus is that Vuzix’s year-over-year earnings growth will reach 25% in the current quarter and 34.4% in the next quarter. My calculations call for earnings growth of about 30% in the current year, and about 32% next year.

Still high on Himax…

Another VR/AR/MR opportunity is Taiwan-based semiconductor manufacturer Himax Technologies (NSDQ: HIMX). The stock is a member of the Growth Portfolio of Personal Finance, our flagship publication.

Himax supplies, or is expected to supply, display circuits to three of the most-popular headset brands: Facebook’s (NSDQ: FB) Oculus Rift, Microsoft’s (NSDQ: MSFT) HoloLens, and the second generation of Alphabet’s (NSDQ: GOOGL) Google Glass.

On May 11, Himax released first-quarter operating results, which fell short of Wall Street’s earnings estimates. However, management provided optimistic guidance for the second half of 2017.

The company reported first-quarter earnings of $1.4 million for earnings per share of 1 cent, missing the average analyst expectation of 5 cents. Nonetheless, Jim Pearce, chief investment strategist of Personal Finance, remains bullish on Himax:

“Himax depends on smartphone sales in China for the majority of its profits. Those sales have been down lately, which has weighed on earnings. But longer term, the company should benefit from the adoption of VR/AR usage across all types of devices, which is growing at an accelerating rate.”

Since Jim added Himax to the PF Growth Portfolio on January 20, the stock has generated a total return of 27.16%.

To cite the BofA/Merrill Lynch report: “The key word for virtual reality is presence — ultimately, trying to alter the experience that the brain is constructing and telling us we are having.”

In ancient Greek mythology, Morpheus is the god of dreams. As I’ve just explained, investing in VR/AR/MR could bring you wealth beyond your dreams. The key is to stick to quality and avoid the thinly capitalized start-ups and penny stocks that are rising on hype rather than genuine technological achievement. As the industry gets frothy, a shakeout is probably imminent among the weaker players. We’ll continue to point you toward the fundamentally strong stocks with staying power.

Got any questions or suggestions? I strive to cover the investment waterfront but if there’s an industry you want me to address, let me know: — John Persinos

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Stock Talk

Harry D Brown

Harry D Brown

I have been investing in VUZI for almost 2 years and it never seems to go anywhere. It might move uo a bit but then comes right back down to where it’s trading now. It doesn’t seem to matter how many new contracts they get. I’m not so sure VR/AR is taking off the way people thought it was going to.

John Persinos

John Persinos

Harry — Your point is well taken. I’d remain patient; the VR/AR/MR boom has sustainable momentum and should lift the stock over the long haul.

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