Himax Technologies (NASDAQ:HIMX) may seem poised to benefit from the potential growth of augmented reality (AR), but there's one major hurdle the company will have to overcome before that happens: AR devices are too expensive for the mass market right now.
This challenge can be overcome -- after all, we're still at the beginning stages of AR's growth. But as a component maker, Himax relies on mass adoption to be able to scale its AR component production. With device prices so high, and adoption rates so low, Himax may not be a top stock to buy right now.
AR is still too expensive for consumers
Northland Capital Markets' Tom Sepenzis wrote in a recent investor note (republished on Barron's):
Augmented reality remains the largest potential for HIMX with its LCOS and WLO products, but the market has hit another stumbling block as prices remain prohibitive for consumers. We believe that this will limit the number of new AR devices for the next 12-24 months....
He's referring to Himax's liquid crystals on silicon (LCOS) and wafer-level optics (WLO) products that the company is ramping up this year, with plans to bring new production online late this year or in early 2018. Himax says that it works with 30 augmented reality device makers right now, and believes that it's at "the beginning of a very long-term growth story" for AR.
The problem is that some AR devices, such Microsoft's HoloLens (which Himax is a supplier for), cost $3,000. To be fair, the current version of HoloLens is for developers. But at $3,000, AR devices are still a very long way from becoming a Saturday afternoon purchase for most consumers.
A Bloomberg article from last year said it could take four to five years for AR and virtual reality (VR) headsets and other technologies to reach mainstream adoption, and that price will be one of the main factors in determining when they take off.
A bit too early
It's hard to get passed the idea that Himax's AR potential may still be a little too far off. Sure, the company is bringing new production lines online to prepare for possible AR component growth, but AR's viability is not a sure thing.
It can be a great thing for investors to find a company that's betting on a new market that's poised for growth, but there appears to be too many unknowns for Himax. First, investors will be waiting until the end of this year, or the beginning of 2018, to see the company's LCOS and WLO production ramp up. If AR was a sure-thing, then sitting patiently for that to come to fruition would be easier to stomach. As it stands, AR is still in its nascent stages.
Second, component makers like Himax can easily getting burned in situations like this, where the need to score big design wins from tech makers can take precedence over earning solid margins and strong revenues. Himax CEO Jordan Wu indicated on the November earnings call that its AR component sales were falling because just one "major customer" was pulling back on demand:
We therefore expect our LCOS and WLO sales to decline in the fourth quarter, as well as over the next few quarters in 2017. We are not particularly worried about the short-term headwind as the said major customer is more committed than ever in the long-term development of the AR product concept, which is viewed as a new computing platform and that Himax remains a critical partner to the customer in these AR efforts.
Himax might be on the right path, but the company's reliance one just one key customer for AR sales -- and current AR device prices being too high -- make me perfectly comfortable staying away from the stock right now.
Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's Board of Directors. LinkedIn is owned by Microsoft. Chris Neiger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.