Our second pick for 2015 is Vuzix Corporation,(VUZI), a company we believe is undervalued given the market capitalization (below $50 million as of Friday’s close) when combined with:
- Investment from Intel Corporation of $24.8 million announced in aftermarket hours Friday. Intel now owns approximately 1/3 of Vuzix Corporation
- Removal of approximately $10 million of derivative liability from Vuzix’ balance sheet concurrent with Intel’s investment
- Vuzix and Intel have a collaborative development agreement for commercialization of future products
- 96% revenue growth reported in the most recent quarter is expected to accelerate as a new sales partnership with Lenovo for sales/distribution throughout China is realized
- NASDAQ listing now possible
Vuzix Corporation designs, manufactures, markets, and sells wearable display devices globally as well as virtual reality products that provide users with 3D computer simulated environments which simulate the real or an imaginary world. Vuzix also develops and sells augmented reality products that provide users a live, direct or indirect view of a physical and real-world environment whose elements are augmented by computer generated sensory input, such as sound, video, graphics, or GPS data.
In addition to winning 4 CES 2015 Innovation Awards, Vuzix has won 13 Consumer Electronics Show Innovations Awards (see Vuzix Corporation Awards PDF) and has 49 patents issued or pending. Vuzix Corporation was founded in 1997 and is based in Rochester, New York with offices in Oxford, England and Tokyo, Japan.
Shares Outstanding: ~19 million fully diluted (includes investment from Intel Corporation)
Float: approximately 7.8 million (per Andrew Haag, Managing Partner, IRTH Communications)
Enterprise Market Opportunity
Early adoption of smart glasses appears strongest in enterprise solutions, an area in which Vuzix has early mover advantages and a noteworthy partnership with SAP. The ability for an engineer to remote in to a technician on the ground as shown in the video below has obvious applications to increase productivity in warehouse operations as well as the airline, oil & gas, and automotive industries among others.
Consumer/Prosumer Market Opportunity
Growth estimates for smart glasses vary widely depending on the source. The most bullish projection comes from IHS which forecast shipments of smart glasses as high as 6.6 million units in 2016, up from just 50,000 in 2012. This projection was based on anticipated rapid consumer adoption of Google Glass, the full launch of which has been delayed until (maybe) sometime this year. Even then, Google Glass has hurdles to overcome according to this Business Insider article.
Investors should note that the issues facing consumer adoption are being addressed by Vuzix. Moreover, Vuzix is the recognized world leader in augmented reality hardware systems.
Widespread consumer adoption will require non-bulky, more fashionable smart glasses. In mid-2015 Vuzix will launch consumer grade smart glasses that will deliver what Google Glass failed to do.
• Vuzix Waveguide based optics engine
• First binocular fashion-wear smart glasses
• Hands-free operation by voice and gesturing
• Hi resolution displays and 1080p camera
• Designed to support Augmented Reality applications
• True eyeglass styling to “cross the chasm” to the mass market
Investors may find this insight from AugmentedReality.org prescient in light of Intel’s investment in Vuzix on Friday.
AugmentedReality.org believes as the smart glasses market expands beyond early adopters and initial winners emerge, that by the end of 2016 the market will experience a “ major shakeup” with mergers, acquisitions, and significant investments. AugmentedReality argues that consumer electronics giants and other players in the ecosystem have a one year window to position their companies in the space (build, buy, partner) or risk missing the opportunity.
Six Catalysts for Share Price Increases in 2015
At MicrocapResearch.com we’ve identified no less than 6 drivers for significant appreciation in Vuzix shares during 2015:
- Intel Corporation investment
The investment by Intel not only provides cash, it wipes out some $10 million in long term liabilities, giving Vuzix a much-improved balance sheet. Moreover, it’s a validation of Vuzix and the company’s patented technology as an early mover in the smart glasses space at both the enterprise and consumer levels.
- Likely Joint Venture/Collaborative Agreement with Intel by March
Beyond purchasing approximately 1/3 of Vuzix, the Intel investment includes the following from the 8-K filing on Friday:
“Collaborative Development Agreement. Within the 45-day period following the Closing, the Company and the Purchaser shall use their commercially reasonable efforts to negotiate in good faith a collaborative development agreement pursuant to which: (a) the Company and the Purchaser would collaborate with respect to the following three technologies of the Company: (i) Flat Passive Waveguides, (ii) Curved Passive Waveguides and (iii) Dynamic Waveguides (the “Specified Technologies”), and (b) the Company would grant to the Purchaser the right to be the lead partner to commercialize the Specified Technologies for a period of time to be agreed upon by the Company and the Purchaser, with the terms of such right (including the markets to be agreed upon, which shall include fashion and athletics) to be further specified in such agreement.”
This collaborative development agreement may involve commercialization of the near-eye display technology described in this October patent application by Vuzix.
- Likely NASDAQ Uplisting
In an October letter to shareholders, Vuzix President and CEO, Paul J Travers, explained:
“The listing of our common stock on NASDAQ, something we have discussed before at Vuzix as a corporate goal, requires as one of its conditions a minimum net shareholders’ equity of $5 million. We would satisfy this minimum standard with the cash exercise of all of our outstanding warrants and the elimination of the related derivative liability. Our objective is to ultimately accomplish the minimum stockholder equity requirement with the least amount of dilution to our existing capital base.”
The Intel investment eliminates the previous barriers of shareholders’ equity and $10 million in derivative liabilities, thereby expediting a move to the NASDAQ.
- Accelerating Revenue Growth in Q4 2014 and in 2015
Vuzix reported 96% sales growth in Q3. While the percentage in growth is impressive, Q3 sales were still modest at $664,586. At MicrocapResearch.com we expect sales to rapidly accelerate as the partnership with Lenovo for sales of Vuzix M100 Smart Glasses throughout China is realized. Initial sales began in November after accreditation by China’s CQC (Quality Certification Center) was announced. Sales of the Vuzix M100 Smart Glasses also began on Amazon.com in November.
- Increasing Consumer Market Penetration
While Vuzix has early mover advantages at the enterprise level and meaningful partnerships with SAP, Lenovo, and XOEye Technologies, the holy grail of smart glasses is the untapped consumer market. We believe Intel Corporation’s investment in Vuzix, and more specifically the “Collaborative Development Agreement” is likely aimed at this market.
Following Google’s missteps in launching smart glass that people will actually wear, the consumer market for smart glasses is wide open. Collaboration between Vuzix and Intel may bring about a pole position in “markets which shall include fashion and athletics”, according to the filing.
- Increased Analyst Coverage and Analyst Upgrades
Presently only 2 analysts follow Vuzix Corporation with a mean price target of $5.75 according to Thompson/First Call. Given items 1-5 above, we believe the current price targets will be raised and that additional coverage will soon follow. This is especially true if we assume (and we do) that a NASDAQ listing is accomplished.
The Bottom Line
Due to the catalysts above, we see room for both near and longer term upside in shares of Vuzix Corporation. MicrocapResearch.com partner Harris Shapiro shares his expertise in on how to handle the expected opening gap on Monday…
Very often a Company will come out with big news on a Friday after the market closes. The news about Intel investing in Vuzix Corporation should result in a big gap opening. This brings us to the question of how to enter the stock. With the shares closing at $4.21 and Intel paying the equivalent of $5.00 a share I suggest paying up to $5.50 on the opening. If it gaps higher we have two choices- either wait till it pulls back or buy a 1/3 position at the opening and buy more if it pulls back. I would recommend limiting any purchase to $6.00. If we miss it I wouldn’t run after the shares. The Company has a very small capitalization and may prove to be an outstanding winner, but limit orders are the call for now.
Supplemental: Vuzix Corporate Overview (December 2014)
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