Seeking Alpha

Industrial Augmented Reality (AR) Is Going To Be Big - Really Big

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Includes: EMAN, HIMX, INTC, KOPN, PTC, QCOM, VUZI
by: Derrick Zierler
Derrick Zierler
Long only, Growth
Summary

Which companies will lead the head-worn Industrial AR revolution?

How can investors profit from the Industrial AR mega trend?

Investors do have a choice: I propose both Index and Pure Play investment strategies.

2017 appears to be the inflection point for Industrial AR using head-worn devices. This year will see the introduction of a number of volume shipping end user devices that enable workers to augment their task view to enhance safety and productivity. You will find regular updates on the growth of Industrial AR at this site.

Combined with the strong momentum behind an Industrial Internet of Things, we should start to see head-worn AR pilot programs transition to larger deployments across major corporations during 2017. Assuming user acceptance, these large-scale deployments will translate into material revenue and earnings for a number of early head-worn wearable AR pioneers.

Anticipating a wave of head-worn Industrial AR adoption beginning this year, I have created a small index of companies I expect to benefit from this mega trend. While I continue to advocate that wearables pure play Kopin (NASDAQ:KOPN) will benefit disproportionately from the head-worn AR adoption wave, I understand that many investors prefer a lower risk approach. As such, I propose the following index for your consideration.

My Enterprise Industrial AR Index

Weight

Company

Category

Ticker

2016 Revenue ($M)

45%

Kopin

Display, Voice, Optics, Device, Software

KOPN

$22.60

20%

PTC

Software

PTC

$1,140.53

10%

Himax

Display, Voice, IC

HIMX

$802.92

10%

Vuzix

Optics, Device

VUZI

$2.13

5%

eMagin

Display, Optics

EMAN

$21.40

5%

Qualcomm

CPU, Device, Software, IC

QCOM

$23,554.00

5%

Intel

CPU, Voice, Device, IC

INTC

$16,374.00

Below you will find rationale for each company's inclusion in the index and weighting:

Kopin Corporation

Kopin provides micro displays for head-worn wearable devices. With the addition of OLED in 2017, they are the only micro display manufacturer in the world to offer transmissive AMLCD, reflective LCOS, and OLED displays. Current head-worn wearable display customers include: RealWear, Fujitsu, Tyco, Google, Vuzix, Garmin, Intel/Recon Instruments, and many others.

Kopin is a pioneer in next generation noise cancellation: their Whisper chip improves NLP voice recognition in high noise environments. Kopin has developed a complete industrial head-worn wearable platform called Golden-i that has been adopted and licensed by Motorola/Zebra, Fujitsu, and RealWear.

For reasons I have written about extensively, I consider Kopin the premiere head-worn wearable pure play and the only company I need to own in this space. As such, it is a core holding in the Enterprise Industrial AR Index with a heavy weighting.

PTC (NASDAQ:PTC)

PTC offers two key AR software platforms: Vuforia and ThingWorx. I consider PTC to be the leader in AR software for the Industrial Internet of Things. In particular, ThingWorx is positioned to be a key enabler for Industrial AR including head-worn form factors.

I believe Industrial AR deployment activity will begin to materially impact PTC's revenue and earnings within the next 24 months. As such, I see this company as a core holding in the index.

Himax (NASDAQ:HIMX)

A LCOS micro display manufacturer with design wins in Microsoft Hololens and a number of other as yet to ship head-worn wearables. I do not consider them to be the current micro display market share leader, but they deserve a spot on the index to lever future design wins. Himax is also a leading head-worn wearable IC and WLO developer, so their inclusion ensures exposure to growth in these areas.

Vuzix (NASDAQ:VUZI)

Vuzix is an early pioneer of head worn wearables and has shipped devices. There is long list of large companies using Vuzix devices in pilot programs, but large-scale deployments remains in question. Vuzix is not well capitalized and there is some risk as to their ability to remain solvent and scale production.

Vuzix also has next generation waveguide optical IP which may become adopted several years out.

Kopin supplies AMLCD displays to Vuzix, so we are levered to any near term success with low risk. However, I have included Vuzix in the index at a 10% weighting to ensure exposure to future waveguide success.

eMagin (NYSEMKT:EMAN)

eMagin is a leading vendor of OLED displays to military customers. They are having some early prototype success in the Virtual Reality segment and may branch out into AR markets. However, I do not believe OLED micro displays will be chosen for design-in for AR devices in the next few years due to cost and other technical issues. As such, I have included eMagin in the index but with a relatively low weighting.

Qualcomm (NASDAQ:QCOM)

Qualcomm is a key CPU supplier to many head-worn device manufacturers. Inclusion in the index provides low risk exposure to high volume and profitable components used in head-worn wearable devices.

Intel (NASDAQ:INTC)

Intel owns Recon Instruments who offers their Jet Pro device to enterprise customers. Intel also provides CPU components to Vuzix for head-worn wearable devices. Intel has some noise cancellation and voice recognition IP that may be useful in the industrial wearable segment.

Inclusion in the index provides low risk exposure to CPU and other components and a stake in Recon's success. However, due to the overall size of the company, head-worn device growth will not impact valuation near term.

Index Or Pure Play Strategy?

Confession: I have not modeled my own portfolio on this proposed Enterprise Industrial AR Index. As mentioned, I continue to maintain a long position in Kopin and remain convinced it is the only company I need to own in this space due to the depth of their head-worn market involvement and design win record across many shipping customers. However, I may now add a long position in PTC to lever IIOT AR software exposure to my portfolio given my belief that we are on the cusp of some massive growth in the industrial AR space.

This proposed index can be considered as a risk balanced way to take part in the growth of this AR segment. However, my own risk tolerance allows me to go "all-in" on a pure play like Kopin. I offer both views for consideration by investors. I would encourage you to monitor performance of both views as I will.

I continue to advocate for a valuation of $4.50/share for Kopin based on cash and IP. However, I expect material revenue and earnings growth to begin this year as Enterprise Industrial AR deployment activity begins in earnest. I expect this growth to drive Kopin's share price much higher.

Disclosure: I am/we are long KOPN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.