(Veteran tech analyst Jon D. Markman publishes Strategic Advantage, a lively guide to investing in the digital transformation of business and society. Click here for a free trial)
Virtual reality headsets have not really caught on with the public. They are not cool.
Yet if recent reports pan out, that is soon likely to change. This is how investors should get ready.
It was 2016 when Apple managers first expressed interest in AR. Chief exec Tim Cook, told analysts the platform could be huge and he promised Apple would make investments accordingly. Since then the Cupertino, Calif.-based company filed numerous patents, bought start-ups, hired new managers and launched ARKit, its AR software developer kit.
Then in 2019 the company purchased Camerai, an Israeli maker of computer vision software used for AR. NextVR, a California VR company was acquired May 2020.
Now all of these investments are likely to bear fruit as early as 2022.
The new Apple headset will straddle both the virtual and augmented worlds, according to Bloomberg. It will have a high definition screen, powerful processors, a fan, and sensors on the front of the device to make sense of the outside world. It will also be “far more” expensive than existing VR setups.
Apple product managers have never been shy about pricing gear above the competition. The bigger test will be how Apple brings VR/AR to the mainstream. Getting Apple devotees to wear expensive computers on their faces will be no small feat.
Still, the odds favor Apple. The company began marketing AirPods in 2016. The wireless white earbuds looked like a pair of golf tees dangling from the wearer’s ears. Analysts estimate that in 2019 Apple sold 60 million units, making AirPods a $12 billion business.
If Apple product managers can move VR/AR headsets in that direction it is going to be a huge win.
Lumentum is best known for making the front-facing sensor Apple uses for iPhone Face ID. This has been a great business yet the real growth opportunity is AR. Currently, the San Joe, Calif.-based also supplies Apple with the 3D depth measuring sensors that are essential for its computer vision software and ARKit development.
Apple uses Lumentum gear because of scale. The firm is the largest supplier of 3-D sensing laser diode in the world. The company has the capacity to supply Apple its competitors, plus new applications primarily in automotive and industrial robotics.
This puts the company in a sweet spot. It’s best customer is ramping up AR, creating more demand for its sensors at the exact moment when its laser technology is sweeping through the automotive and industrial worlds.
This week Lumentum managers announced they reached a definitive agreement to acquire Coherent ( (COHR) - Get Report) for $5.7 billion in stock and cash. Coherent uses photonics and lasers for precision manufacturing, aerospace and defense, microelectronics, and instrumentation.
While shares of Lumentum have come under pressure since the announcement, investors may be missing the bigger picture. Both Coherent and Lumentum are great businesses alone. They will be even stronger together as the combination with bring massive scale.
Currently shares trade at only 14x forward earnings and 4.3x sales. These are perfectly reasonable valuations given the potential new markets for sensors and laser-based manufacturing.
Investors should use the current weakness to start longer-term Lumentum positions.