Over a week has passed since Google's (GOOG) Sergey Brin made his charismatic presentation featuring Google Glass. Since that time (and after intense public discussion), most experts now agree that Himax (HIMX) is likely powering Google's revolutionary eyewear. Thus, the public investor debate is now turning to "does it matter?" Indeed, that is the right question.
However, many investors are looking at it the wrong way. While the success of Google Glass has a bearing on the matter, the greatest impact won't come from how many units of Glass sell this holiday season. In fact, the greatest impact has already been exerted.
By moving up the release date for Glass and demonstrating several working prototypes, Google has laid down the gauntlet. In my original Seeking Alpha article, I quoted augmented reality pioneer Steve Mann as saying "There will be Apple Glass, and Google Glass, and RIM (now BlackBerry) Glass. These companies are all working on glass. I think everyone is going to be making glass. I think we're also going to have a glass war instead of a smartphone war."
More recently, he said, "Google Glass is much less ambitious than the computer-mediated vision systems I constructed decades ago. What Google's involvement promises, though, is to popularize this kind of technology."
Thus, it doesn't matter whether Google sells 10 pairs of Glass or 10 million. What matters is that Google's involvement is already popularizing this kind of technology. This can be seen in the plethora of patent filings that have recently been filed by the likes of Apple (AAPL), Microsoft (MSFT), Samsung (OTC:SSNLF), Sony (SNE) and others. In short, if Google doesn't get it right, someone else will. In fact, smartphone glasses may not even be the first hit. For example, Microsoft also has its sights set on gaming goggles. This demonstrates that computerized eyewear is ready to cross the chasm.
The timing is right for this to occur. The iPhone took smartphones across the chasm in 2007. Tablets took off in 2010. It's now 2013 -- so, what now? Several arguments can be made for wearable computing to emerge next.
First, the proliferation of smartphones is well under way, so it makes sense for high-end accessories and extensions to enter the marketplace. Products like Glass promise to leverage consumers' investment in the smartphone and augment the experience.
Secondly, the components required to produce products like Glass have been rising in capability, while falling in price. That will continue in the coming months and years. Like the 3D printing market, we're reaching an inflection point where Google's $1,500 Glass will soon be followed by a $999 competitor, which will be closely followed by a $499 competitor...
…and then "everyone" will buy one.
In short, it's not Google that will enable downstream suppliers to flourish - it's the entire burgeoning industry. The Apples. The Microsofts. Anyone who hopes to retain control over how customers interface with their home and mobile devices is getting involved in this market. Even if it's simply a defensive insurance policy, products are being developed, just in case the market takes off. This is spurring advances in innovation and accelerated cost reductions (via new efficiencies and economies of scale), catalyzing a self-fulfilling prophecy.
Considering the stakes and the speed at which technology is now moving, this is happening faster than many investors currently fathom. Typically, breakthrough products suffer endless delays. However, the timeframe for Glass has been moved up. Within 12 months, don't be surprised if every major player has an announced competitor to Glass (or other computerized eyewear product). Then, it won't be a matter of how many units Glass will sell. The question will be, "how many units will the entire industry sell?" This is a critical part of what will ultimately determine the fate of component suppliers like HIMX, Kopin (KOPN), and Nuance (NUAN).
Remember, a stock's current value is the discounted value of its future cash flows. 2013 is only one year in that equation. It also happens to be a year for which Wall Street analysts have projected zero revenue from Glass. So, investors shouldn't be debating whether Glass will sell 10 units or 10 million - they should be debating whether they will sell more than zero. Any more than that will represent upside to the associated vendors' 2013 estimates.
For example, beyond 2013, every unit of Glass -- and any other computerized eyewear - has the potential to drive $20 of revenue to LCoS (liquid crystal on silicon) vendors like Himax. At 40% gross margins, just 1 million units of upside will increase the company's 2014 EPS from 42-cents to 46-cents. That may not sound like much, but it increases the EPS growth rate from 13.5% to 23.5%. Given a PEG ratio of 1, earnings of 42-cents and growth of 13.5% generates an EV of $5.67, while 46-cents and 23.5% growth generates an EV of $10.81.
That's a $5 difference in valuation from just 1 million units. That's more than enough upside potential to cover the company's entire valuation as it stands today. By adding back the company's net-cash balance, we derive a $12 valuation. This is why we chose HIMX as one of our picks to triple in a recent Seeking Alpha article.
Day traders and technical analysts can argue whether the shares have gone too far too fast, but in the world of risk and reward, this represents an asymmetrical set of possible future outcomes. We can do the math on what 2, 5, or 10 million units will do for the company's earnings, but that's not the point right now. For now, it's far more important to recognize that the valuation argument isn't about Google Glass - it's about the evolution of computerized eyewear and the chasm it appears ready to cross. That alone is enough to justify higher future valuations…for all vendors involved.