Share prices of Vuzix (NASDAQ:VUZI), a developer of augmented reality devices, skyrocketed nearly 1,500% over the past 12 months as demand for its glasses and headsets surged throughout the pandemic.

That rally boosted Vuzix's market cap from about $50 million a year ago to over $1.4 billion. Is Vuzix still a good investment on the AR market, or is there far too much growth baked into its stock price already?

What the bulls will tell you about Vuzix

Vuzix went public in 2013, the same year Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) Google unveiled Google Glass. Intel (NASDAQ:INTC) bought 30% of Vuzix in 2015.

A woman wears Vuzix's AR glasses.

Image source: Vuzix.

Unlike Google, which initially promoted Google Glass to mainstream consumers, Vuzix targeted enterprise clients with its M-series glasses and manufactured AR glasses for OEM customers. It launched its consumer-facing Blade AR glasses, which can access Google Assistant and Amazon's Alexa, in 2019.

Vuzix's revenue has risen significantly over the past five years, and its growth accelerated last year as remote work in the enterprise and healthcare sectors spurred fresh demand for its M-series glasses.

Fiscal Year

2016

2017

2018

2019

2020

Revenue (Millions)

$2.13

$5.54

$8.09

$6.67

$11.58

Growth (YOY)

(23%)

160%

46%

(18%)

74%

Data source: Vuzix. YOY = Year over year.

Wall Street expects Vuzix's revenue to rise 88% in 2021. It isn't profitable yet, but its net loss narrowed from $26.5 million in 2019 to $17.9 million in 2020. Analysts expect its losses to narrow again this year.

Only about a quarter of Vuzix's shares are held by institutions, which suggests the company still hasn't impressed the big investors yet. But once that percentage rises, its stock could head much higher.

What the bears will tell you about Vuzix

Vuzix's growth seems promising, but investors should take analysts' estimates with a grain of salt for two reasons. First, only four Wall Street analysts currently cover Vuzix, meaning opinions might be less balanced than they are for other stocks that are scrutinized by dozens of analysts.

Second, those forecasts might not fully account for slower spending after the pandemic passes, or tougher competition in the nascent AR market.

Google relaunched Glass for enterprise users in 2017, Microsoft launched its second HoloLens headset in 2019, and Qualcomm recently launched an AR reference design that will let OEMs quickly produce glasses and headsets on their own.

A pair of AR glasses displaying directions.

Image source: Getty Images.

Amazon also launched a pair of Alexa-enabled smartglasses called the Echo Frames, while Apple and Facebook are also reportedly developing their own AR glasses.

All these heavyweight challengers could pull customers away from Vuzix. These larger companies can afford to sell their devices at lower margins to tether enterprise and mainstream customers to their software ecosystems.

Vuzix's stock also trades at about 65 times this year's sales, making it pricier than many of the market's highest-growth tech stocks. That frothy valuation could limit its upside potential and expose it to higher bond yields, which are sparking a rotation from growth to value stocks.

Vuzix also recently raised $97.8 million (before fees) with a new offering of 4.77 million shares priced at $20.50 per share. That move should significantly boost its cash and equivalents, which stood at just $36 million at the end of 2020 but will also make its stock even more expensive.

Lastly, Intel sold its entire stake in Vuzix earlier this year. Intel might have sold its shares as part of its retreat from the wearables and smartglasses market three years ago, but the sale further suggests Vuzix's upside potential remains limited at these frothy levels.

Is Vuzix a top augmented reality stock?

Vuzix faces a lot of challenges, but it's still the best "pure play" on the AR market right now. Its bigger rivals have deeper pockets, but their AR products will only generate a tiny sliver of their total revenue.

Vuzix doesn't need to go toe-to-toe with Amazon, Apple, or Facebook. It merely needs to secure a small slice of the broader AR market, which Grand View Research expects to grow at a compound annual growth rate of 43.8% between 2021 and 2028.

Vuzix's high valuations should prevent it from replicating its recent multibagger gains in the near future. Nonetheless, it remains one of the most promising and direct ways to invest in the growing AR market.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.