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 an optimal investment play on this megatrend: chipmaker Himax (NSDQ: HIMX). But first, let’s explore the context.

Many readers lately have been asking me about the right sectors into which they should rotate. Three sectors that enjoy strong tailwinds in 2024 are aerospace/defense, construction, and technology.

Technology is particularly enticing as economies strengthen and corporations dig into their huge cash hoards to make long-deferred IT investments. The tech sector outperformed in 2023 and it’s continuing to surge in 2024.

One of the most promising subsets 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. I’ve written about this subset in previous articles.

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.

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.

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

The following chart shows the global revenue potential of virtual reality alone:

High on Himax…

Himax (market cap: $962 million) is a fabless semiconductor manufacturer headquartered in Taiwan and founded in 2001. “Fabless” means the company designs microchips but contracts out production rather than owning its own factory.

Himax doesn’t get the same attention as its behemoth competitors, such as “Magnificent Seven” denizen Nvidia (NSDQ: NVDA), which sports a market cap of $1.7 trillion (that’s trillion with a “t”). But as valuations for Big Tech reach lofty levels, small fry Himax is better able to move the needle in terms of growth. I also like the fact that Himax doesn’t get much attention from the financial media.

Himax’s stock price has been under pressure lately, largely because it derives a significant portion of its sales from China and that country’s economy is struggling. However, the company’s long-term prospects remain firm, which makes the stock a buying opportunity right now. The following price chart indicates that Himax is oversold:

Himax supplies, or is expected to supply, display circuits for popular VR/AR/MR headset brands. The company is a pioneer in a host of display imaging processing technologies used in TVs, laptops, monitors, mobile phones, tablets, vehicles, digital cameras, and many other consumer electronics devices.

WATCH THIS VIDEO: Will The “Magnificent Seven” Ride High in 2024?

With a strong order book, excellent cash flow, and robust research and development, Himax is a small-cap player with outsized potential. Small caps languished in 2023 but they’re poised to move from laggards to leaders in 2024, as interest rates fall and economic growth accelerates.

On February 6, Himax reported fourth-quarter 2023 operating results that beat analysts’ estimates on the top and bottom lines. The highlights:

  • Revenue: $227.7 million versus analyst estimates of $226.8 million;
  • Earnings per share: $0.14 vs. estimates of $0.11 (22.7% beat);
  • Free Cash Flow: $53.69 million, up from $13.42 million in the previous quarter; and
  • Gross Margin: 30.3%, in line with the same quarter last year.

The average analyst expectation is that Himax will generate year-over-year earnings growth of 44.80% for full-year 2024.

Based on analysts offering 12-month price targets for HIMX, the average price target for the stock is $7, for a gain of 40%. But I think that’s a conservative estimate. Consumer spending and tech innovation are poised to accelerate this year and fill Himax’s coffers.

The key to making money in the tech sector 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. I’ll continue to point you toward the fundamentally strong tech stocks with staying power.

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John Persinos is the editorial director of Investing Daily.

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