Credit: Shutterstock photo2015 is shaping up to be quite the year in the Augmented Reality/Virtual Reality space.There 's a case to be made that Himax ( HIMX ) is a top way to play AR/VR. At the current PPS, HIMX makes a great addition to any portfolio in search of a tech/semiconductor play. Additionally, Himax is presently trading at a discount, down -48% YoY, primarily due to the delay of Google ( GOOG ) ( GOOGL ) Glass. The company maintains strong fundamentals, no long-term debt, and they pay an annual dividend coming up in July.
In the first couple months of the year we have seen several new and existing players show off their AR/VR devices at CES, MWC and GDC events. Many of these companies are existing Himax customers and as such many are using Himax inside their respective AR/VR products.
Augmented Reality AR
With respect to AR, Himax has become a one-stop-shop for AR with its industry leading Front-Lit LCOS microdisplay, WLO and CMOS offerings. In addition, Himax has expertise in 3D displays and processing as well as developing custom solutions through its ASIC design services. Combined with an experienced supply chain, the range of components and services offers a competitive advantage for Himax as companies shop for suppliers and look to bring products to market as quickly as possible. The improved LCOS design also reduces the bottleneck in manufacturing the optical engine, which Jordan Wu explained on the recentearnings conference call
Himax supplies LCOS microdisplays for Google Glass , Microsoft Hololens , Oseterhout Design Group (ODG) , Optinvent , Lumus and Lenovo . In addition to their own products, leading optical engine producers Optinvent and Lumus are sourcing their optical products with Himax LCOS inside to many customers covering everything from Ski Goggles ( RideOn ) to Hard Helmets ( DAQRI ), just to name a few. Most of these AR products will use a form of waveguide technology allowing for the lens to be as thin as normal eye wear.
In addition to the above LCOS customers that Himax has been working with for awhile, on a recentearnings conference callit was stated that there are some exciting new tier-one customers for their LCOS business. Who the new tier-one customers are is yet to be seen, but as things heat up in the space, I suspect we will learn about them soon.
The LCOS/WLO business at Himax is expected to hit an inflection point this year as noted on the latestearnings conference call The timing of this is consistent with the AR product launches expected second half of the year.
VirtualReality
On the VR side on things, Himax is known to have supplied Oculus Rift, ProjectMorpheus and others with its high-resolution timing-controller tcon. These products have gone through several iterations and recent checks indicate that the Himax tcon specs match the tcon in the latest prototypes for these devices. Sony ( SNE ) and Samsung ( SSNLF ) are long-time Himax customers and Morpheus still appears on the latest Investor Presentation , which also includes a fairly comprehensive list of Himax customers and business segments. WLO, CMOS, LCOS, display IC and touch drivers are other components that Himax could supply in VR devices. Taking a look at the new HTC Vive , you can see there are a number of external sensors on both the headset and handheld controllers. The supplier for the sensors is not publicly known, but HTC is a long-time Himax customer and the sensors could be WLO.
Intel (INTC) made an investment into Vuzix (VUZI) and this is of interest because Intel also is invested in Himax Display Inc . The investment developed through the acquisition Himax made of Spatial Photonics in 2012 , where Intel had previously invested in the company with a similar deal as Vuzix.
Coincidentally, Himax is working closely with Intel on the latest Google Glass design that will now contain an Intel chip . Intel is making a pretty aggressive move into wearables and the internet of things. We can expect the synergies between Intel, Himax and Vuzix to continue to grow and it would seem likely that we will see an announcement about the collaboration between Himax and Vuzix sometime this year.It also is likely that Intel will continue to leverage Himax when possible on many of its new ventures in the space.
The fact that Himax is working with the leading tech heavyweights on the top AR devices and supplying tcon and likely other components for many if not all of the top VR devices means that you don't have to pick a single product winner. Himax is the pure way to play the entire AR/VR space.
2015 the Year for AR/VR
2015 is finally the year for AR/VR and this is supported by the fact that most if not all of the products mentioned above have publicly announced consumer launch dates starting inJune 2015 and spanning throughJanuary 2016.Consumers and industries alike are beginning to accept the products and the weird factor has in many ways dissipated. This will work in Google's favor because as an early pioneer of the space. They have taken a lot of heat for some of the design flaws found in Glass 1.0. That said, Google is making great strides with Glass 2.0 and has been shipping the new design to "at work" customers since October, despite only formally taking Glass 1.0 offline in January. Google's new strategy, headed up by Tony Fadell , should finally bring the product across the finish line this year. Fadell is known for his time at Apple (AAPL) as "one of the fathers of the iPod" and for founding Nest, which was acquired by Google.
At this point, Google Glass 2.0 and Microsoft (MSFT) Hololens are expected sometime in the Q3-Q4 '15 time frame and Project Morpheus announced a date for 1H of '16 . A release date for Oculus Rift was just leaked and is expected to beNovember 2015 . With respect to all of the lesser known AR products mentioned above, they have dates ranging from June -December 2015.
In addition to all of the exciting things happening in AR/VR, Himax is seeing tremendous growth in 4K TV driver IC, CMOS/WLO and in-cell TDDI. Specializations in 4K, WLO and in-cell TDDI will allow Himax to penetrate into new markets and further diversify their portfolio. CMOS/WLO has penetrated into areas of automotive, surveillance and innovative products such as Petcube . As one of leading pioneers of in-cell TDDI, it has allowed Himax to tap new markets in wearables such as smartwatches. This creates additional stability and growth at a time when AR/VR products ramp up and set up for launch in the second half of this year. Ultimately growth is expected to explode in these areas as we move into 2016 and beyond.
On the most recentearnings conference call Jordan Wu explained how they are making adjustments within their current facilities this year as they add new equipment and prepare for product launches, but he also makes a point in mentioning that he is expecting the need to expand into their new land with new buildings next year.That 's very revealing and represents the growth many experts expect to see in AR/VR in the coming years. Jordan has never been this decisive with respect to timeline as he has remained sensitive to customer release dates.
On the margin side of things, Himax is growing in all of the areas that should see significantly higher margins than traditional display IC components, which have been their bread and butter. Taking a deeper look at Microsoft Hololens in particular, it is my hope to shed some light on what the revenue projections could look like for this device. Analysts covering the stock have made their own overall revenue projections based on a number of factors that effort will not be duplicated here.
Microsoft HoloLens Assessment
Microsoft HoloLens - Exterior Component Breakdown
( Source )
Microsoft HoloLens - Himax Components
- 4 x WLO - Depth & 3D information
- 1 x CMOS - Detector camera - eye tracking & IR sensing
- 2 x Front-Lit LCOS Display
- HPU (HologramProcessing Unit)
Of all of the components, the HPU is really the only component in question. Public sources indicate that Microsoft has been working with Himax on this device at the time Google took a stake in the company in 2013. Microsoft is listed as the ASIC services customer and the HoloLens graphics both appear on the latest Investor Presentation linked previously.
Based on information available on the Himax website with respect to ASIC services and Himax expertise in 3D display and processing combined with other areas of expertise in components such as CMOS/WLO, it seems reasonable to conclude that Himax was the key player involved in designing what's described as the HPU. Moreover, by examining multiple patents related to 3D and LCOS HUD where Himax,Microsoft and ODG are cited provides further evidence of timeline and collaboration related to what could be described as HPU related technology ( Patent 1 , Patent 2 , Patent 3 , Patent 4).
Additionally, last year it was reported that Microsoft paid up to $150 million to buy wearable IP from Himax customer ODG. Coincidentally, as announced at CES 2015 , ODG also has a new consumer product launching later this year that shares some resemblance to the technology in HoloLens. What's more, if you have ever wondered if Himax technology was out of this world, both Microsoft and ODG are working with NASA JPL with their respective devices.
According to sources , Intel is expected to be supplying the CPU/GPU with an atom chip code-named Cherry Trail . Himax technically also could supply other chips such as power IC and any touch drivers the device might have.
Based on the above components, a conservative estimate for Himax revenue per HoloLens device is likely to be in the $40-$75 range and possibly higher.
Microsoft HoloLens Market
In assessing the potential HoloLens market, one must look at a number of factors. Windows 8 and Windows 7 users will get upgrades to Windows 10. Microsoft looks to create a platform around Windows 10 where the PC, Xbox, Phone, HoloLens,Surface , etc., all connect and share the same services. The fact that HoloLens is not only a standalone device but one that can connect with other windows devices for a variety of purposes creates and endless supply of potential uses.
- Xbox One: 10+ million units sold
- Xbox 360: 84+ million units sold
- Kinect: 24+ million units sold
- Minecraft Users:100+ million
- Surface: 5 + million units sold
- Windows Phone 2014: 43+ million units sold
- Windows Phone 2018 (Projected): 115 million units
- 3D printer: 500,000 units (2.3 million estimated by 2018)
- Windows 8: 250+ million licenses
- Office 2013: 20+ million licenses
- Windows 7: 400+ million licenses
- Office 2010: 100+ million licenses
One of the larger more obvious markets for HoloLens is gaming. Using Kinect as a baseline, one can conclude that the market for HoloLens will be significantly higher than that of Kinect. Microsoft's acquisition of Minecraft certainly came at an ideal time and it's clear that Microsoft is committed to taking the success of Minecraft and using it as a launching point for HoloLens. Minecraft game play is a natural fit for this type of technology and if Microsoft is able to allow the player to switch between or in and out of Xbox, PC and HoloLens, it's going to be an even bigger selling point.
Beyond that, we can assume that HoloLens will have significantly more game play applications for the Xbox than the Kinect had and as a result should receive much more love from the game developer community. We are already seeing some of this play out and with the developer conference next month, it's only a matter of time before there are more formal announcements with respect to future games and applications.
Microsoft also sees HoloLens as an entertainment device that can be used to consume content such as web, video and apps that would normally be consumed on a PC, tablet or phone. Additionally, it can be used as a communication/social device with apps such as Skype and Facebook (FB).
Another major market will be in education and the work place. HoloLens can be used to enhance the traditional experience of a PC. The types of applications here are endless but we can expect to see plenty of new ways to improve any design or creative process done on a PC. Additionally, HoloLens opens up new interactive ways of learning that otherwise would not be possible. The Kinect had some successes in education but I suspect HoloLens will take this much further.
In conclusion, as applications and games get built out for HoloLens, the usefulness for the device becomes even more transparent and valuable to the end user. When taking a look at the markets that are controlled by Microsoft through the Windows 10 platform, there is very little in the way of competition. For instance, Google Glass and HoloLens are different markets with very little overlap by my assessment. When you take this all under consideration, the estimated sales for HoloLens very well may be tied directly to the success of the Windows 10 platform as a whole. Even under the worst possible scenario, the three-year projections for this one device will add significantly to Himax's revenue.
Microsoft HoloLens 3 year estimated sales (conservative estimate at $50 per unit)
Low : 25 million units at $50 per unit = $1.25 billion revenue for Himax
Medium : 50 million units at $50 per unit = $2.5 billion revenue for Himax
High : 75 million units at $50 per unit = $3.75 billion revenue for Himax
Microsoft HoloLens 3 year sales volume timeline
2015(Oct-Dec): 500,000 - 1 million units
2016 : 3-5 million units
2017 : 7-20 million units
2018 : 15-50 million units
3 Year Total: 25-75 million units
Conclusion
Himax is finally poised to see tremendous revenue growth over the next couple of years using even the most conservative projections. Himax is a proven leader in the AR/VR space and is presently working with nearly all of the tier-one customers that are developing products in AR/VR and for many of them, Himax is working with them on multiple designs simultaneously.
Furthermore, for products such as Glass and HoloLens, they are not competing in the same market for the same users and each device serves a different purpose from an application perspective. Google's new strategy to target the industry by rolling out the "at work" initiative will prove to be a smart move. Globally the market for Glass in these "at work" applications will be quite large. Consumers will make a natural shift to the technology as real world applications surface, such as those found by other wearables today. Consumers are already beginning to learn to use wearable technology for its intended purpose and then set it aside. Unfortunately the experiment which was Google Glass Explorer created this culture of wearing the device 24x7. When one pays $1,500 to be a part of experiment I guess it's only natural to push it to the limit. That said, I think Google has pivoted and corrected course and all will be forgotten when Glass 2.0 launches with a consumer friendly price point.
As it relates to Himax, soon we will know whether Glass 2.0 contains 2 x LCOS displays or 1. The cubed display will go away and the new display will look like a normal eye -wear lens. Google's partnership with Intel / Luxottica (LUX)/ Oakley on the design should result in something special. What other Himax components Google will use in Glass 2.0 remains to be seen, but WLO or CMOS are likely candidates. Google is working with Himax on multiple product designs and naturally there's much speculation on what those products might be. I suspect we will learn about them in the not so distant future.
The smaller players in the space will find success if they target market their design, applications and prospective customers correctly and don't attempt to do too many things. We are already seeing this with a number of the smaller companies using Himax for their respective AR/VR products.
As the release dates near, anticipation and demand for the products will continue to build and this should play favorably for Himax stock. Upon looking back on 2015, it will be the obvious turning point for AR/VR, but moving into next year and beyond, the future for AR/VR is even brighter as content and services become more mature. All of these factors will benefit Himax in a major way in terms of revenue growth and improved margins.
The downside risk exists as in any security, but is minimized at this PPS as there is plenty of support at $7. Analysts PTs range from $7 - $12. The BoA $12 PT more accurately reflects revenue increases from products and components mentioned in this article. The stock has suffered from what appears to be options manipulation, but as these product launch dates move closer, the upside is potentially quite significant considering the stock was trading as high as $16 when only Google Glass was on the horizon. The volatility is hard to deny but the stock tends to move up quickly on good news. Further buzz surrounding Google Glass or Microsoft HoloLens is sure to trigger some upward momentum.
Finally, investors shouldn't forget about the nice dividend right around the corner.
Other References
- Q4 Earnings Transcript
- Q3 Earnings Transcript
- Windows Holographic Wikipedia
- Google buys stake in Himax
- Intel hires wearable computing talent
- Google Glass and Intel
- Intel and Luxottica announce multi-year collaboration
- Kessler Optics Near Eye Display
- Apple and Himax engineering connection
See also The Global Instability Premium on seekingalpha.com
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
