We’ve certainly seen our share of “next breakthrough” promises from Louis Basenese — he has worked for a variety of publishers (mostly under the Agora umbrella, I think) and is now promoting a service that he calls VentureCap Strategist, published by Wall Street Daily, and now he’s dangling his take on virtual reality in front of potential subscribers as an inducement to pony up (currently “on sale” at $1,350).
And, of course, we know that buying little speculative stocks for the “next big thing” is not going to work out well a lot of the time — but we can’t resist the occasional little speculation. So Louis’ ad caught my eye, and I thought I’d try to figure out what it is that he’s really talking about for you.
The big idea of virtual reality is, of course, firmly entrenched in “cutting edge” consumer electronics culture already — and with the launch of the Samsung Gear and the Oculus Rift from Facebook, among other less-publicized headsets, the interest is high enough that many newsletter pundits are trying to capitalize… each of them talking up the “next big thing” or the company that owns the critical intellectual property or component designs or other must-have ingredients that will make virtual reality profitable for investors.
Nobody is recommending Samsung, or Apple, or Alphabet, or Microsoft or Facebook as plays on this new “virtual reality” — that’s because those are all huge, profitable businesses, and virtual reality is unlikely to make a big dent in their income statements in the next few years even if it is as big a hit as the most optimistic futurists believe.
Basenese pulls out some numbers to buttress his argument, and he didn’t just make them up — DigiTimes seems to be the source for his $5.1 billion in augmented reality (AR) and virtual reality (VR) sales this year, as well as the forecast that sales for the two will hit $150 billion in 2020, but DigiTimes is also making some big assumptions (as they’ll readily admit), modeling AR as a business that will move on a trajectory like early smartphones and address a huge market, and VR as a “niche” gaming and 3D entertainment business. You can see the basic projections here. That’s not the only market report that’s made projections about VR, of course — Markets and Markets, for example, is projecting VR as a $16 billion market by 2020 (not clear on whether they’re splitting out VR and AR, or splitting them in the same way)
I guess either of those scenarios is as possible as anything else, but we should remember that this is all soothsaying — virtual reality as a niche business for hardcore video game customers is on a fast track, with rabid early demand for the new Oculus and other headsets setting the stage nicely, but augmented reality is still awaiting the “Aha!” moment when consumers really get interested in something beyond a fancy headset for police or a heads-up display for mechanics or factory workers. The first version of Google Glass was a worthy first attempt at a very limited AR wearable, and there have been other “smart glasses,” but there’s not much evidence yet that the marketplace is clamoring for them. Google Glass will almost certainly be reborn in some fashion, and the Microsoft Hololens is getting a lot of attention as a consumer version of a fighter-pilot’s projection visor, but if people were getting beaten up for wearing Google Glass into bars I can’t imagine what would happen if they walked in with a Hololens.
So although you could make an argument that Facebook is the most potentially levered big “brand” player in VR right now, simply because their revenue base is so much smaller (FB’s annual revenue is closing in on $20 billion, Alphabet/Google is around $75 billion, a little below Microsoft’s ~$90 billion, and Samsung and Apple are both above $200 billion), even that requires a bit of a leap of faith. Facebook is certainly committed to virtual reality, as they are to other big priorities like artificial intelligence and increasing global connectivity… but VR is certainly not going to be more than a rounding error in Facebook’s results in 2016, even if the Oculus Rift is more successful than average expectations and sells a million units. Mark Zuckerberg has indicated that sales need to hit 50-100 million units before VR becomes a meaningful new “platform,” and the headsets are likely to lose money for a while and be very low-margin compared to Facebook’s core advertising business. (OK, before you call me out on this: I suppose you could throw HTC in with that mix as maybe levered to VR headsets, too, but HTC has been unable to market their core products into meaningful sales against big competitors, so it’s hard to take them that seriously.)
Which is why everyone, including Louis Basenese, is trying to come up with the “hidden” winners of the virtual reality revolution — Michael Robinson and Ray Blanco have touted NVIDIA because of their leading graphics processing (VR demands dramatic computing power), Jason Stutman has touted HiMax for their microdisplays (they powered the tiny Google Glass screen), and even Louis has pitched other companies in VR — back in December I concluded that he was probably recommending Spectra7 for the role their equipment can play in gesture recognition, a key element in interacting with virtual worlds.
Everyone’s looking for the emergence of “Intel (INTC) inside” branded VR guts, or the ARM holdings (ARMH) or Qualcomm (QCOM) chip design/patent owner/supplier opportunity in the VR space — and hopefully everyone’s also a bit wary of the fact that we remember ARMH and QCOM and INTC because they stand out as hugely profitable survivors among a great many semiconductor and component manufacturers who have bitten the dust because of their inability to excel in a harshly competitive and margin-eroding field. Businesses like semiconductor and electronic component design and production, where capabilities double every year or so and prices get cut in half almost as quickly, are very, very difficult and leave a lot of failures in their wake.
Now, still striking while the VR/AR iron is hot, Basenese is hinting at something else. What could it be? Would it be possible to have an even longer lead-in to this teaser solution? Inquiring minds want to know…
The ad gets us started with a few video scenarios — one of a police pursuit using an AR headset that’s clearly the Golden-i from Kopin, one of a football-themed ad for Microsoft’s HoloLens, and one an AR video game from Magic Leap (owned by Google) where you shoot at tanks that come through the wall of your living room.
And then talks up that “buy the secret guts” idea:
“It’s not a matter of which brand of headset, or whether VR or AR will outsell the other, or even that $120 billion or more is headed into AR.
“Investing in the patented hardware and software now used in both VR and AR headsets, no matter the brand – that’s where investment fortunes could be made.
“And that’s where you could find your fortune, too – your pot of gold!
“In the technologies these headsets rely on – and specifically in the one company whose technologies are powering the VR and AR revolution.”
How about something more specific about this company?
“The company I’m now ready to introduce you – this is the Levi Strauss among the VR/AR gold miners.
“Google, Intel and Samsung among them.
“Plus, it also sells its patented hardware and software to companies that are developers and suppliers themselves.
“The easiest way for you to think of this company is to compare it to the electronics company HTC in its early days.
“HTC built great smartphones for other companies before branding the phones as their own.
“And in the process it saw its stock rise 1,897% over nine years.”
That “Levi Strauss” bit is a reference to the old saw that you don’t want to own gold miners, you want to own the company that sells the “picks and shovels” (and dungarees) to those miners.
And then we get a bit more specific:
“This company is the bedrock on which VR/AR stands.
“It’s the only ‘pure play’ VR/AR company in the world.
“A highly trusted one at that.
“In fact, it’s the single largest U.S. manufacturer of micro AR display systems for the U.S. military.
“Its Helmet Mounted Display System (HMDS) is now deployed in the new F-35 Joint Strike Fighter – the most advanced jet fighter in the world….
“… this is the U.S. military’s go-to company for micro display AR technology.
“From fighter pilot helmets to night vision binoculars to thermal weapon gun sights…”
OK, so that’s really enough to feed to the hungry Thinkolator… but let’s just grab a couple more clues to make sure:
“The company sells smart sunglasses (pictured below) for cyclists – using a 2mm hi-def display module. The world’s smallest….
“the company also sells goggles for skiers and snowboarders that display the wearer’s speed, jump analytics, distance, trail maps, altitude and GPS location.
“All the while keeping the wearer connected to calls and texts via Bluetooth….”
I won’t make you suffer through too many more of the clues (you can see the full ad here if you’re curious), but we are also told that this company made the headset featured in the police video, and that it was “conceived at MIT 30 years ago”… so yes, the Thinkolator can confirm that what Louis Basenese is hinting at here is indeed Kopin (KOPN).
Kopin is a very small technology company, with a market cap of just $120 million or so — and they have about $80 million in cash, so unless there’s some hidden obligation that I don’t see on their balance sheet that means investors are valuing the operations of the company at just about $40 million. Teensy.
And they were indeed conceived at MIT about 30 years ago, they were founded by Dr. John Fan and were early leaders in the business of making small active-matrix LCD displays (for camcorder viewfinders and the like), though they did also make military products, and Dr. Fan says he was an early (20 years ago) advocate of headset-mounted displays akin to Google Glass. Their other key product was a line of chips that are used in mobile phones, HBT chips, but that was in the III-V business that they sold back in 2013 and got the final cash payment from early this year (that sale is where much of their big cash balance comes from).
They did also design that headset that was used in the video that Basenese included in his ad — as mentioned above, that is the Golden-i headset that uses the design from Kopin and software from a firm called Ikanos Consulting (now renamed Intoware). That was released in 2011, with some iterative updates over the years, and hasn’t yet become a big seller as far as I can tell from Kopin’s financials — really, they aren’t trying to be a manufacturer of Golden-i headsets, the language on their website, calling this a “wearable headset reference design,” implies that they’re trying to use this design as a way to get others to build stuff using their components.
Those components include microphone technology called “Whisper Chip” that apparently is an improvement over other “noise reduction” or “speech enhancement” systems (so you can talk into the wind while bicycling, or whisper to your headset in the middle of a loud party, for example), as well as the display technology itself that continues to be their core business… the tiny LCD screens for “near eye” display. And yes, they do have new “smart glasses” for cyclists that they’re offering up for sale this Summer — that’s essentially a more active and streamlined version of Google Glass, with sport sunglasses that display your workout data, etc. That product is called Solos, not quite available for sale yet. No idea what it will cost, but probably something less than $500 like other “smart glasses” (including the Recon Jet, which also uses a Kopin display — Recon, which also makes smart snow goggles, was bought by Intel last Summer).
Just browsing around the web and looking at these kinds of products, you can get a sense of the experimentation that’s currently going on — with this and other augmented reality products, it looks like we’re going to see more “niche” wearables for specific types of workers or athletes well before we see people wearing them as they walk down the street. It kind of feels like all these companies are throwing stuff at the wall and just waiting to see what consumers get excited about — we didn’t know we needed the iPhone before it came out, but it was at least “cool” and was following in a product trend that was starting to be popularized already by Palm and Blackberry, so if we’re starting to see our first AR devices that appeal to at least some power users, what’s going to be “cool” in wearables or augmented reality and drive mass adoption?
Kopin has some similarities with HiMax, which is why I mentioned it in my piece about Jason Stutman’s HiMax teaser ad a few months ago — like HiMax, it’s hoping that the new VR/AR business will get demand back up for some of their core products (and new versions of such products, like microdisplays and display driver chips)… and like HiMax, it’s still getting most of its revenue from microdisplays and has failed to generate any sustainable revenue growth in recent years. (There’s a new “short attack” article out on HIMX from the short selling site StreetSweeper that tries to poke some holes in the Virtual Reality hype, by the way).
Because of its small size, Kopin is probably as close to anyone as being a “pure play” on AR — which isn’t saying that much, in my view. There is reason for some optimism if some of their technologies, like their speech enhancement “Whisper Chip”, are actually better than competing technologies, but I have no idea whether that’s really true. Here’s what the CEO said in the press release for last year’s results:
“In 2015, our revenues from sale of products for the wearable market doubled over 2014 to approximately $12 million. As more companies adopt Kopin’s view that the headset is the next smartphone and voice will someday replace touch, we expect more new customers and industries to develop. We have been very active in new design-in activities, including a product for public safety which our customer is expected to debut in the second quarter of this year. Furthermore Solos and Whisper Chips are on track for a summer release to provide additional revenue growth, which until now has been based on our display and display modules. Now our heavy lifting of technology and product development is finishing as planned and we are entering the marketing and sales phases. With our extensive patent portfolio, design wins with Tier One customers and our strong balance sheet, we are very well positioned to take advantage of the growing and potentially huge wearable market.”
The question really is, I guess, whether or not demand for more AR headsets will create meaningful volume demand for Kopin’s microphone or display-related products. Partly that depends on competition, where I certainly don’t have thorough knowledge, and partly it depends on overall market growth. Right now, it’s a well-financed hope for the future — $12 million in revenues in wearables last year, which hopefully will be growing enough to start to make up for declining revenues elsewhere (total revenue for 2015 was about $32 million). Their operating expenses including R&D have been around $35 million a year, so they’re not that far from being able to scale up to profitability IF there are some higher-volume products in wearables that drive 100%+ revenue growth for a few years. There are only two analysts posting estimates for KOPN, no surprise for such a small firm, and their average forecast is that revenue will drop again this year before increasing markedly in 2017 (though it would still be just $42 million in revenue next year in that scenario, and they’d still be losing money).
Real growth is obviously a fairly big “if” at this stage, and there’s a long history of KOPN putting together pretty disappointing results for more than a decade before they sold their biggest revenue division (III-V) that had become commoditized, and before they really pushed this turnaround to bet the company on AR and wearables… but there is at least the potential for a real and potentially growing business inside this microcap company.
They’re not there yet, as evidenced by the fact that overall revenue is still declining, and the share price is close to all-time lows, but there is at least a plan. I can’t tell you whether it will work, and I’m not invested in the stock, all I can really tell you for sure is that Kopin is almost certainly the stock Louis Basenese is hinting at in ads for his VentureCap Strategist.
Sound like your kind of investment? Have any experience with this or any of the other virtual reality “story” stocks? Let us know with a comment below.
Disclosure: I own shares of Facebook, Alphabet/Google and Apple, and call options on Nvidia and Apple. I don’t own any other stock mentioned above, and won’t trade any stock covered for at least three days per Stock Gumshoe’s trading rules.