The tech industry is driven by the constant development of new technologies. Eagle-eyed investors who spot those winning advancements can often profit by investing in the right companies.
However, it can be tough to separate the winners from the losers without a proper understanding of the underlying technologies. So today I'll discuss three next-gen technologies and the easiest ways to invest in their growth.
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Facial recognition
Facial recognition technologies are often used to secure devices or identify people. Research firm Markets and Markets expects this nascent market to grow from $4.1 billion to $7.8 billion between 2017 and 2022, fueled by rising global demand for better biometric security and surveillance technologies.
Facial recognition works by using vertical-cavity surface-emitting lasers (VCSELs), which project thousands of low-power lasers onto a surface to "see" its 3D shape. A promising supplier in this market is Finisar (FNSR +0.00%), which generates most of its revenue from fiber optic components.
Sales of Finisar's fiber optic components have been weak over the past few quarters due to a cyclical slump in China. However, Finisar recently started shipping VSCELs to offset those declines. Its top customer is Apple (AAPL +1.39%), which uses its VSCELs to power the iPhone X's TrueDepth camera and the AirPods' proximity-sensing capabilities.
Over the next few quarters, Apple plans to significantly increase its orders of VSCELs, all of which will come from Finisar's new plant in Sherman, Tex. Apple also awarded Finisar $390 million from its Advanced Manufacturing Fund last December, and claims that the commitment will make Finisar's Sherman plant the "high-tech VCSEL capital of the U.S."
Augmented and virtual reality
VSCELs are also widely used in augmented reality (AR) headsets, which project digital overlays on real-world objects. However, a broader way to gain exposure to both the AR and virtual reality (VR) markets is Himax Technologies (HIMX +1.05%). Himax is the market leader in the liquid crystal on silicon (LCOS) and wafer-level optics (WLO) components for AR and VR devices.
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LCOS projectors are used to project images on surfaces close to the user's eye. Himax supplies these chips for Alphabet's Google Glass and Microsoft's HoloLens -- two of the most widely recognized AR headsets in the world. Alphabet also owns a 6% stake in Himax.
The WLO process produces cost-effective, miniaturized optical chips that significantly shrink down camera modules for consumer electronics. Apple already uses Himax's WLO chips to power the iPhone X's Face ID capabilities, and the chips can be used alongside other components to power other 3D-sensing devices. In the VR market, Himax supplies timing controllers, OLED driver integrated circuits (ICs), and power ICs for high-end headsets like Facebook's Oculus Rift and HTC's Vive.
Research firm IDC expects global spending on AR and VR solutions to nearly double from $9.1 billion in 2017 to $17.9 billion this year. This means Himax could see robust sales of AR, VR, and 3D-sensing components offset the weakness of its core display driver ICs business, which is still struggling with cyclically soft demand for LCD screens.
Connected and driverless cars
VSCELs and WLO chips are also being increasingly used in driverless cars, which need to "see" obstacles to avoid them. However, a more direct way to invest in the connected and driverless car market is Cypress Semiconductor (CY +0.00%).
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Cypress is the market leader in Wi-Fi/Bluetooth combo chips for Internet of Things (IoT) devices, USB-C controllers, NOR flash memory chips, and auto instrument cluster microcontrollers (MCUs). All these components are being installed in new high-end vehicles.
Wi-Fi/Bluetooth combo chips and USB-C controllers tether mobile devices to the dashboard, NOR flash memory is installed in advanced driver-assistance systems (ADAS) platforms, and auto instrument cluster MCUs sync all of a vehicle's data onto its dashboard.
Cypress notes that newer cars require more semiconductors than ever, with "basic" models using about $300 worth of chips, and "high-end" models using about $1,000 in chips. That's why the company expects its automotive business to grow at a compound annual growth rate (CAGR) of 8%-12% between 2016 and 2021. The strength of Cypress' auto chip business, which posted 16% sales growth in 2017, complements its strength in the industrial and IoT markets.
But mind the risks
Finisar, Himax, and Cypress are all great ways to invest in next-gen technologies, but investors should recognize the risks.
Finisar is still weighed down by its weak fiber optics components business. Himax faces similar issues with its display driver IC business, and Cypress could face competition from bigger embedded chipmakers. Therefore, investors should do their due diligence before buying these future-oriented tech stocks.
