Where Will Vuzix Be in 5 Years?

Vuzix (VUZI 2.68%), a developer of augmented reality glasses and headsets, was a penny stock throughout 2019 and most of 2020. Its stock remained below $5 a share as its unpredictable sales and ongoing losses curbed the market's enthusiasm for the growth potential of its AR business.

Vuzix's stock price dipped below $1 during the COVID-19 crash last March. But it subsequently bounced back above $4 by July, hit $10 in late December, and continued climbing to the mid-$20s this year. Let's look back at Vuzix's history, why it suddenly attracted a stampede of bulls, and whether or not it can maintain that momentum over the next five years.

Image source: Vuzix.

A first-mover's advantage in a niche market

Vuzix was founded in 1997. It initially developed products for the military but started producing consumer electronics devices in the early 2000s. Vuzix went public in 2013, and Intel (INTC 5.41%) bought 30% of the company for $24.8 million in 2015.

At the time, Vuzix was selling its flagship AR glasses, the M100, to a handful of enterprise customers. It subsequently launched the M300, M400, and M4000 devices for enterprise customers over the following years, and developed AR glasses for big customers like Toshiba.

Vuzix launched its consumer-facing Blade AR glasses, which can be tethered to Amazon's (AMZN 2.61%) Alexa and Alphabet's (GOOG 0.87%) (GOOGL 0.75%) Google Assistant, in 2019. As a result, Vuzix's annual revenue rose more than fivefold between 2016 and 2020.

Data source: Vuzix. YOY = Year-over-year.

That growth was impressive, but the AR market suffered several setbacks during that period. Google discontinued its consumer-facing version of Google Glass in early 2015 and pivoted the device toward enterprise users. Intel halted its AR headset partnership with Vuzix in 2016.

The first pair of AR glasses from Magic Leap, the start-up backed by Google and other tech giants, also fell woefully short of expectations when it finally arrived in 2018. Intel shut down its New Devices Group, which housed its wearable devices and smartglasses, that same year.

Those challenges, along with other disappointing product launches, snuffed out the hype for AR devices and caused many investors to question Vuzix's growth potential. 

So what changed?

The AR market was seemingly on the ropes by 2019, but the pandemic boosted demand for its products again in 2020. Vuzix CEO Paul Travers called 2020 a "transformational year" for the AR market, as the pandemic sparked a shift to remote work in the enterprise and healthcare sectors.

Image source: Vuzix.

Vuzix attributed most of its growth in 2020 to robust sales of its M400 smartglasses, as well as brisk OEM orders from medical and defense customers. It ended the year with 184 approved or pending patents for AR technologies, up from 150 patents in 2019.

Vuzix didn't provide any specific guidance for 2021, but Travers claims the company is "well-positioned to achieve significant year-over-year comparative revenue growth in our first quarter and throughout 2021" as it sells more M-Series and Blade smartglasses.

Analysts expect Vuzix's revenue to rise 88% to $21.8 million in 2021, then jump another 87% to $40.6 million in 2022. Those estimates are rosy, but the stock is pricey at over 60 times this year's sales. Vuzix's bottom line also remains in the red, and analysts expect it to remain unprofitable for the foreseeable future.

But can the tailwinds offset the headwinds?

The bears will likely point out a few other major issues. Vuzix enjoys a first-mover's advantage in the AR market, but bigger challengers loom on the horizon, including Apple, Facebook, and Qualcomm -- which recently launched an AR reference design that lets OEMs easily produce their own headsets.

Intel also gradually reduced its stake in Vuzix and sold all its remaining shares earlier this year. The departure of its top backer and imminent competition from larger tech companies could throttle Vuzix's growth.

The bulls will argue that Vuzix doesn't need to go toe-to-toe with those tech giants. Instead, it just needs to hold onto a sliver of the expanding AR market.

For example, Grand View Research believes the AR market will grow at a compound annual growth rate (CAGR) of 43.8% between 2021 and 2028 to become a $340.2 billion market. If Vuzix merely keeps pace with that market, it could generate multibagger gains within a few years.

Moreover, only 15% of Vuzix's shares are owned by institutions, and only four analysts currently cover the stock. If the stock gains more mainstream attention, it could have much more room to run.

So where will Vuzix be in five years?

Vuzix is still a speculative stock, but its first-mover's advantage, established customer base, and expanding lineup of enterprise-facing AR devices could drive its stock higher over the next five years. It'll be a bumpy ride, but the potential rewards could easily outweigh the near-term risks.