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Humanizing Tech

How To Invest in Augmented Reality If You’re Not a VC

Fountainhead News: June 20, 2017

I. Setting the Stage

As part of our ongoing series in The Base Code, we thought we’d give an update on the next opportunity you should take a look at. Much of the problem with normal people who want to invest in startups or new emerging technology is that they can’t. You have to be an accredited investor, have a relationship with the founders, and have enough cash to drop for a small share of equity (sometimes $25K to $50K, if you catch them in the Seed round).

So how does a normal person interested in emerging tech get into the game?

You have to Think Different.

Which means you have to find the enabling technologies being built by public companies, and then go invest in their stock.

It’s how we generated 4x returns in 1 year by seeing the mathematic AI trend coming and investing in NVIDIA’s enabling technology, their GPU (aka market leader). In that case, our Valuation Model would give us some help but not tell us anything at all about future demand for an existing product in a new market. That’s the gut read that you need from being deep in the Tech, Media, Telecom (TMT) world for many years.

II. The AR Opportunity

It’s no secret that big tech companies are investing heavily in AR through our phones. Facebook announced an AR library, so too did Apple at WWDC. Snap is making circular spectacles, and many startups are clamoring to get into the game.

So the question is: can we find a situation similar to NVIDIA + AI, but in the startup world? Of course, you can invest in Apple, Snap, or Facebook but you’re not really getting enough exposure to AR because it represents just a small aspect of their product library.

We believe there is. The company’s name is Finisar and they make optical communication devices. And it just so happens that one of their products is custom-suited for AR and it’s called a VCSEL. From the site:

A vertical-cavity surface-emitting laser (VCSEL) is a semiconductor-based laser diode that emits a highly efficient optical beam vertically from its top surface. Other common semiconductor optical sources include Edge Emitting Lasers (EEL) that emit light from the side and Light Emitting Diodes (LED) that emit light from the top and sides.
Tiny laser light embedded in a wafer

The benefits of this include:

  • Works in very short distances
  • Can put many of these lasers very close together for precision lighting
  • Low power
  • 4K resolution, fast frame-rate, and 3D video
  • Been around for 15 years so the technology is robust

All of these add up to a perfect enabling technology for an Augmented Reality laser close to a human face that can quickly change images while also optimizing battery life.

III. The Financial Valuation

Finisar, a $1.5B company, that’s been around for a quarter century just announced its highest ever revenue during their Q4 2017 earnings call last week (deck). They have $1.2B in cash on their balance sheet with operating income growing 3x in the last year. Here’s their 5-year stock price:

As you can see, not much up-and-to-the-right movement. At least not yet.

Their products enable high-speed voice, video and data communications for networking, storage, wireless, and cable TV applications. But their Optics division accounts for 25% of revenue, their biggest driver, which we believe is about to become much bigger.

Let’s take a look at their valuation from our 100% open source model:

As you can see they have a great comparative economic profit where they’re generating more returns with their cost of capital. In addition, most of the value of their stock price (76% in fact) is being driven by the real physical assets and cash they own. So only about a quarter of Finisar’s value is driven by future speculation for price growth.

At least that’s what is built into their price from the market’s perspective.

And we know that the Efficient Market Hypothesis is BS due to what happened with NVIDIA. That’s because it assumes that all public knowledge and insight has already been built into the price.

But not many people outside of those working on AR tech truly understands how it works or which other technologies are required to make it work.

There have been some rumors that Apple is buying their optical lasers, at least in part, from Finisar. If that’s the case, imagine hundreds of millions of products being sold and shipped to Foxconn in order to make the iPhone 8 with its Augmented Reality capabilities. Or more likely, in the future, the glasses that Apple is making that likely won’t hit the streets for another year or so.

During the earnings call Finisar stated they expect to ship “tens of millions” of 3D sensors in the October quarter. That seems to line up with the holiday rush of a massive consumer product, no?

Which means Finisar’s biggest problem will be manufacturing these components at scale while maintaining high quality. If so, that record revenue Finisar just saw is only a preview. And we’re likely to have another NVIDIA on our hands.

Of course, this last bit is left to the reader to figure out.

We can lead you to water, but ultimately, you’ve gotta be the one with the cojones to drink.


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How To Invest in Augmented Reality If You’re Not a VC was originally published in Humanizing Tech on Medium, where people are continuing the conversation by highlighting and responding to this story.

from Stories by Sean Everett on Medium http://ift.tt/2rRaljH