Buzzwords are one of those “things” that excite technology enthusiasts. So trends like “virtual reality” and “augmented reality” may entice investors to pay any price multiple.
AR, or augmented reality, superimposes computer-generated input on top of the real world. Alphabet Inc’s (NASDAQ:GOOGL, NASDAQ:GOOG) ill-fated Google Glass is a good example. VR, or virtual reality, is an artificial environment where the user’s actions partly determine what happens in that environment.
The reality is clearly more muted for this sector. The promises for this market are high, but the rate of adoption for the technology will not happen as fast as everyone thinks. With that warning, let me explain how to buy in the future of VR and AR profits when it finally comes.
VR Tech Stocks to Buy: Ambarella (AMBA)
Not only does it supply for the automotive industry, but it is embracing VR. At CES, AMBA introduced the industry’s first 8K camera SoC (system on a chip). Used in high-end drones, the video camera supports 360-degree capture and virtual reality cameras. Ambarella forecasts VR cameras will start ramping up this year.
Though it forecast flat revenue growth for 2017, VR is clearly a promising market that will offset the weak wearable sports camera sales made by GoPro. AMBA admits the VR market is very new. Sales will pick up, but it is still a small part of total revenue. Ambarella is optimistic but cautious about the market. Consumer demand and supplier adoption for VR technology will determine how sales do this year.
VR Tech Stocks to Buy: Himax Technologies (HIMX)
Himax Technologies, Inc. (ADR) (NASDAQ:HIMX) is best known for having Alphabet invest in it a few years ago. Since then, markets pin supply contracts for AR/VR will outpace this large panel display driver supplier.
Himax’s contracts to VR makers are real, but the company cannot reveal who they are due to confidentiality agreements. Its 24.2% gross margin in 2016 will grow once smartphones and electronic devices build in both AR and VR solutions.
“We also expect our gross margin to be under pressure in the short-term due to continuous pricing pressure and less favorable product mix of driver IC products, lower revenues from high-margin AR/VR related businesses and lower NRE income.
You could do a lot worse.
VR Tech Stocks to Buy: Microsoft (MSFT)
Microsoft Corporation (NASDAQ:MSFT) is a key player in the VR market. Its HoloLens is still for developers to test for the viability of VR and develop applications for the environment.
For now, the HoloLens is too expensive. In 2016, Microsoft made the headset available to developers and business customers for $3,000 per unit. Microsoft’s first challenge is getting software that runs best in a headset environment and not on a computer screen, smartphone or TV set.
HoloLens is clearly more interesting than Google Glass and has stronger interest. Whereas Glass retreated from the consumer market and narrowed its market to industry, Microsoft is aiming for both the business and consumer market. Nasdaq already uses HoloLens solutions. It used the solution to build its next Mars rover.
VR Tech Stocks to Buy: Sony (SNE)
Sony Corporation (NYSE:SNE) is the logical leader making VR mainstream. It’s the PlayStation VR is outpacing sales of Oculus Rift. Sony revealed it already sold 915,000 units of the PSVR. Supply constraints are limiting sales.
Sony’s massive user base in the gaming market, through the PlayStation console, makes it easy for the company to establish adoption for its VR headset.
At a 16.2 times forward P/E, Sony’s stock is still not overvalued. Continued demand for its PlayStation and a higher output of PSVR just might send it share price even higher.
VR Tech Stocks to Buy: Synaptics (SYNA)
Synaptics, Incorporated (NASDAQ:SYNA) is not a name that investors would associate with the future of virtual reality. Yet consumer adoption of VR will benefit Synaptics.
SYNA’s TDDI roadmap is built on the expectation TDDI will be the solution for LCD-based displays on smartphones. When that happens, the virtual reality experience on OLED smartphones will get better.
For the time being, SYNA thinks the next wave of opportunities is in the IoT and wearables market. AR and VR are also on that list. Synaptics is a great pick for value investors, as the stock is down around 40% in the past year and trades at a forward P/E of 9.8.
Virtual reality is still a small part of the business, but if the market explodes, SYNA will benefit.
VR Tech Stocks to Buy: Silicon Motion (SIMO)
Silicon Motion Technology Corporation Corp. (ADR) (NASDAQ:SIMO) supplies solutions for customers needing an SSD controller. NAND flash makers also need SIMO. Customers include Intel Corporation (NASDAQ:INTC), Micron Technology, Inc. (NASDAQ:MU) and SanDisk, which is now owned by Western Digital Corporation (NASDAQ:WDC).
The growing demand for quick read and write access to data storage will benefit SIMO. The growth in virtual reality, which processes lots of graphical data, will push demand for SIMO’s newest solutions. In 2017, the company is releasing a PCIe NVMe SSD controller as the industry, not just VR, pushes suppliers to make things that run faster.
In the near-term, Silicon Motion’s bright prospects are in the “ordinary” SSD, eMMC controller and NAND. The tight demand in NAND will drive SIMO’s near-term prospects.
As of this writing, Chris Lau owned shares of Himax Technology, Inc.