In this podcast, Motley Fool senior analyst Jason Moser and contributor Matt Frankel discuss:
- Apple's bet on spatial computing.
- A major interface problem for headset adoption.
- Meta's VR subscription service.
- Less obvious companies that could benefit from a boom in immersive tech.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on July 08, 2023.
Matt Frankel: From reports that I've read, Meta, they're not having trouble selling their Quest headsets. I mentioned 20 million sold so far, the overwhelming majority is the newer, the Quest 2, and the Quest 3s do up later this year. They're struggling with retention, meaning keeping people engaged. A lot of tech companies have a similar problem. How many people bought a Peloton during COVID and now it's a Cove Rack? Because engagement fell off after a while. Well, Meta is having a similar problem.
Mary Long: I'm Mary Long and that's Motley Fool Contributor, Matt Frankel. He caught up with Jason Moser to talk about the boom in immersive technology. They discuss how Apple's Vision Pro stands out from Meta's Quest headset, the consumer and industrial use cases for immersive tech, and three less obvious companies that could benefit from this trend.
Jason Moser: Matt, this week we're jumping into the wide world of immersive technology. We've got virtual reality, augmented reality, there's mixed reality. These are all certainly becoming more popular conversations these days. Today we want to cover the latest in Apple's headset aspirations. We'll also talk about Meta's latest subscription offering, and we're also going to talk about some alternative ways to invest in this new computing paradigm beyond the obvious names. But Matt, let's get started here with Apple because this is the big news. Recently Apple releasing its new headset; the Vision Pro. This is something that we've been waiting for for a long time. Always rumors out there that they were going to be releasing something at some point now we finally actually got it. Matt, it's a great look in a piece of hardware. I'm still not fully sold on mass adoption for something like this, particularly at that price tag. What do you think?
Matt Frankel: I think it's historically been a mistake to underestimate Apple fans' willingness to spend money. [laughs]
Jason Moser: That's an evergreen thesis.
Matt Frankel: It really is.
Jason Moser: It really is.
Matt Frankel: How many people said the iPhone was too expensive when it first came out? At the time, you could walk into any AT&T or Verizon store and walk out with a free phone if you signed a contract, not so with the iPhone but people still bought it because it was a superior product. All the early reviews say that with the Vision Pro, you get what you pay for. I did see that they're cutting targets on production. The original goal was about a million units in the first year then they slashed that, I think 400,000. Now we're hearing that some suppliers are only planning on about 150,000 in the first year. I'm not sure that I buy it. I think the adoption is going to be greater than we think. I think the million might actually be a relatively conservative target given Apple, there are over two billion active Apple devices throughout the world. You need 0.1% of their customer base to adapt this product.
Jason Moser: I do fully agree with you on that notion that you should never really underestimate what Apple fans will do. I have always said they can stamp their logo on a rock and just sell three million of them immediately no questions asked because people would just view it as a special rock for some reason. The power of that brand. I'm really not kidding. I really believe they could do that. So you're welcome, Tim Cook if you're looking for a new product line. But yeah, it is one of those things. When you look at this versus something like formerly Oculus, but the Meta's Quest line, the pricing is what really stands out to me and I think we'd all agree that the Vision Pro of today isn't going to be the Vision Pro of 10 years from now or even five years. This is their first step. This is their playbook. Let others get out there, test the waters, and bring new hardware, new concepts that they're figuring out what works and what doesn't work. Then Apple jumps in there with its own interpretation of that hardware, of that software in making it do what they think is most valuable. I don't think this is any different, honestly. It's not like headsets are that new. Meta has been at this for a while with Oculus. There are a lot of early adopters.
The price points for those Metal headsets are considerably lower. You're talking about something in that $500-1,000 range for a Quest headset, generally speaking, versus that initial $3,500 price tag for Vision Pro. That's going to be considerably different. Now the one thing I do think in regard to this very first iteration of the Vision Pro. I don't think this is meant for the mass consumer. I think this is that tool that gets out there and really helps Apple build this spatial computing ecosystem. That's where it's going to take some time to develop, of course, but it can really pay off because to your point there on devices, Apple is also closing in on one billion subscriptions, and that is just extremely powerful. Oftentimes subscriptions that people aren't even thinking about. They're just set on rebuild every month and Apple's got such an audience, they really are very loyal to the brand and its offerings. Again, while they are slashing that guidance for the initial offerings though there's some tech supply issues and other some problem with the displays. But they are working on cheaper versions of this hardware that's still a couple of years out at least, but they are already thinking in that direction of, hey, if we want to get mass consumer adoption here, we are going to need to bring that price tag down. I have no doubt that happens. I think the bigger question really is the use case. What do you find the real use case to be with something like a Vision Pro or even just headsets in general?
Matt Frankel: It feels like what they're trying to do is different than what Meta is trying to do. For Meta it's like a gaming product. It's not a computer replacement. Apple is trying to do a replacement for a laptop, for a TV. They're talking about the potential for 3D movies and things like that. Instead of your TV, instead of your laptop, if it can effectively replace those two things, 3,500 doesn't sound that ridiculous. You mentioned that they are planning a cheaper version two years from now. With Meta, Meta sold about 20 million of its headsets. The overwhelming majority is that lower-price Quest 2 headset their second iteration, which I can see the same thing being true for Apple. But they've sold 20 million headsets without an existing hardware ecosystem that Apple already has.
Jason Moser: Yeah.
Matt Frankel: Apple has that advantage. Apple is not going to sell 20 million of the initial version of it. But there's a lot of demand for this and especially if the functionality justifies the price tag, which the initial reports are that it does to some degree. It supposedly leaps and downs beyond even the Quest Pro from Meta in terms of just the technology. We'll see how it plays out. But I believe I remember you being an iPhone user are you on the waiting list for this?
Jason Moser: I'm an iPhone user and no, I'm not on the waiting list for Vision Pro. I've got two kids to put through college, so this is definitely on the back burner for a little while. I'm always fascinated by new technology. I wouldn't consider myself an early adopter, but I do like to get in there and tinker around these things to understand what they are or problems that they're trying to solve. I think one of the interesting dynamics with Vision Pro that is not reflected as something like the Quest is that the Vision Pro, it looks like it incorporates mixed reality, augmented reality, and virtual reality into one experience. Those are different, virtual reality being that immersing yourself into an entirely new digital world, shutting yourself off from that outside world, whereas Augmented Reality is more overlaying that digital world on top of the physical world. There are use cases for both. Quest historically has been a VR device. I think to your point that is something that could potentially open up a lot of additional use cases for something like the Vision Pro as it evolves. I think the other key for Vision Pro and for all of these heads is ultimately the form factor, it's the interface. I don't know how long if you've ever put any of these headsets on.
I've never put on a Vision Pro, but I've heard the same thing in regard to Vision Pro, they are very cumbersome after extended wearing. You put one of those things on for like an hour, you really start to feel it. You do see the need for this form factor to change, for it to come, its size needs to be reduced. It needs to be a bit more seamless and a little bit more tolerable for longer periods of time. I have no doubt that will happen. But it is going to take a while. The evolution of these things, it's going to take some time because if you figure where we are today with the Quest, and it's been around for some time like you said, around 20 million units sold in total, it's still fundamentally the same design more or less. It's just this big, cumbersome headset. I think ultimately the form factor needs to come down. It does make me wonder, I think about this from time to time. I have to ask you. There's a part of me that's really starting to believe that maybe the headset isn't the way. Maybe that's not the interface that ultimately brings spatial computing to the masses. The caveat there is that if they can whittle this thing down to make it small enough to where it's like a pair of eyeglasses and I think that changes everything. I don't know if they can get it to that. Maybe they can. But what do you think? These headsets, in their current iteration today, it just doesn't seem like that's something that allows for mass adoption.
Matt Frankel: I would bet the team at Google agrees with you. Remember the Google Glass that they were developing 10 years ago?
Jason Moser: Oh, yeah.
Matt Frankel: That was essentially a pair of glasses.
Jason Moser: Yeah.
Matt Frankel: The problem is the technology is not there to make the necessary infrastructure inside of it small enough to fit in the pair of glasses and have the technology of the Vision Pro right now. The holy grail, you're right, you could be wearing one right now and I would have no idea because you're wearing a pair of glasses if you could do everything that the Vision Pro is going to do. Google ended up discontinuing the glass actually this year after about 10 year development period because they just couldn't get it to where it needed to be and prefer to focus on the software instead of the hardware. But you're right, they're really cumbersome. The Vision Pro, it's designed to be, like you said, an augmented reality, not a virtual reality headset. In two years we could see people walking around the grocery stores wearing a Vision Pro. Right now you generally don't see people wearing the Meta Quest 2 walking around a grocery store or anything like that right now, but that's absolutely a possibility with the Vision Pro.
Jason Moser: Yeah.
Matt Frankel: The new reality might be people walking around and driving around even with these other heads.
Jason Moser: I reckon it's possible, but I'm going to bet against it. How about that?
Matt Frankel: That's the goal, to complement reality instead of replacement.
Jason Moser: Yeah.
Matt Frankel: That would be better accomplished with something the size of a pair of glasses.
Jason Moser: No question. You take it to the next step. You talk about wearing these things outside of the home in overlaying the digital on top of the physical to bring more use cases into your everyday life. Driving, for example. We've got companies that are building windshields that incorporate this augmented reality technology, sands headset. You don't need a headset to use these windshields. That's what makes me wonder regarding these headsets. We've already got companies that are building out this technology and overlaying the digital on top of the physical without necessarily having to incorporate a headset into the mix. It does make me wonder, but again, I do listen, I know the form factor is going to come down. I know the size is going to become less and less of an issue as time goes on. I think that's going to be a big piece to the puzzle where that should help not only Apple but all headset makers. Speaking of all headset makers, I wanted to talk about Meta for a second here too. You mentioned I think earlier just regarding the Quest, the Quest serves a gaming population primarily. I think that's right for the most part. Meta, really leading into that they launched a VR subscription service with their Quest line to really capitalize on that population. This is a service, $7.99 a month. It's something that looks like it is catering specifically to that gaming audience.
Matt Frankel: From reports that I've read, they're not having trouble selling their Quest headsets. I mentioned 20 million sold so far.
Jason Moser: Yeah.
Matt Frankel: The overwhelming majority is the newer, Quest 2. The Quest 3s do up later this year. They're struggling with retention, meaning keeping people engaged.
Jason Moser: Yeah.
Matt Frankel: A lot of tech companies have a similar problem. How many people bought a Peloton during COVID and now it's a coat rack? Because engagement fell off after a while. Meta's having a similar problem, especially with the newer cohorts, like people who got a Quest as a present last year or something like that. They're having trouble keeping them engaged. So not only would this be a recurring revenue stream and things like that, but it would help solve the problem of keeping people engaged. With a subscription, they get new games every month. It's more of a refresh cycle and keeping people engaged than just selling the hardware and being done with that.
Jason Moser: Yeah. Again, going back to those core use cases and I think that for headsets in general, we've seen an easy core use case that we've discovered is in entertainment. I think gaming is the big part of that thesis there. From that perspective, gaming is obviously one of the larger market opportunities out there for investors to be digging into. It's also one where we're seeing a lot of competitive jockeying in this space, companies trying to really establish their position. We got Microsoft trying to acquire Activision Blizzard. That may or may not work out, but you know what a powerhouse Activision Blizzard is in that space. Technically they still have a hollow lens, which is their version of the Vision Pro. But again, it's tremendous technology. There are certain use cases where it's really proven very helpful. I think healthcare is one. I think that speaks to a lot of these headsets. We see the industrial use cases for a lot of these headsets. It's the consumer use cases that become a little bit more difficult to really fully understand beyond something just like entertainment, gaming, things like that.
Matt Frankel: That's what Apple is trying to do. If there's one thing Apple's good at, I mentioned their customers will spend money, but Apple's really good at justifying the cost. They're very good at it. Their ecosystem pairs really well together. People are willing to spend money, pay a premium for the Apple Watch, for example, because it pairs so well with everything else Apple. If they can accomplish that with the Apple headset the Vision Pro, then great. I think that that's where they're trying to go to move beyond just gaming applications, like I mentioned, to be a laptop replacement. Instead of buying four monitors, if I could just look and see four monitors in the air in my room, that could justify a $3,500 price tag.
Jason Moser: Certainly very possible.
Matt Frankel: If they could replace having a projector and a projection screen on my wall to watch movies, it could justify that price tag. That's an ambitious price. This is not the first ambitious price that has come from Apple. I think if it's anything like other product launches, they could do a good job at justifying it.
Jason Moser: I think ultimately what they're going to do here is what they do so well, getting that first iteration out there and just learning, discovering the use cases, what they're doing well, where they need to shore things up. This is a company with more resources than most countries on the face of this Earth. [laughs] I certainly do not doubt they will give it their all. I like your statement at the top of the show. You just cannot underestimate. You cannot underestimate Apple. They're so talented in what they do and they always seem to figure out a way and the brand power, they're a very loyal user base indeed. To be continued. We'll certainly enjoy following along the progress here and revisiting down the line. Matt, before we wrap it up here, we wanted to talk a little bit about just some alternative ways for folks to consider getting exposure to the immersive technology space. Because we talk so much about these big tech companies, the hardware, the headsets. These are the obvious players in this space because we talk about them so much. They're always in the headlines. But there are a lot of other ways to really invest in immersive technology. There are companies that'll help powering these headsets. There companies that are capitalizing on the software, incorporating these types of experiences into their business models. We wanted to just throw a few extra ideas out there. I know you have one. I'll kick us off here with one and then go to you.
But one that I continue to cover, one I like, I've talked about it on Twitter before and I've actually recommended it in both of my services here at the Fool. It's a Cadence Design Systems. The ticker is C-D-N-S. Cadence Design Systems, this is a company that produce the software, the hardware, and the intellectual property that helps its customers build their electronic products. Cadence customers are the customers that deliver electronic products from things like chips and boards to systems for market applications, hyperscale computing, 5G communications, automotive, aerospace. Cadence is a company that's helping all of this happen. If you look at some of the customers of Cadence, we're talking about companies like Nvidia and AMD, Samsung, Microsoft, Marvell, even Qualcomm to name a few. Cadence Design Systems, probably, and the name maybe not as many are familiar with, but a company that has a really entrenched position in the value chain beyond just immersive technology, but absolutely playing a role in helping this immersive technology takeoff. What's a company you've been following that you think offers an opportunity for investors?
Matt Frankel: Mine is a great complement to Cadence Design Systems. They're more on the software side of things. I like Applied Materials, they're more on the hardware side. They make the systems that semiconductor manufacturers use to make chips. They use very complex machinery. When you think of electronics circuits considering nanometers, you can't just buy a 3D printer and make a chip.
Jason Moser: I wish it were that easy.
Matt Frankel: You need very specialized equipment to do that and that's where Applied Materials comes in. You mentioned the end game of augmented reality devices is something that looks like a pair of glasses. That's going to need increasingly complex and smaller chips and that's going to create a ton of demand for Applied Materials products if they can keep up with the technology and really keep up with what their customers need. It's already been a 10-bagger over the past ten years. A very profitable company of about a 30% operating margin. Their semiconductor equipment industry is expected to roughly double in size by 2030 and they should be a very natural beneficiary of that.
Jason Moser: I like that. I like that a lot. In wrapping it up one more, this is a company that really utilizes immersive technology in its business. But I think a lot of folks out there are familiar with Axon Enterprise. Ticker is A-X-O-N. Axon Enterprise, they develop, they manufacture, and sell what they call conducted energy weapons or CEWs. Just think TASER. This is the TASER company. This is the company that sells the TASER brand here in the US and internationally. It's got the TASER side of the business, that's the hardware side. Then it has the software and system side of the business. It creates a very attractive recurring revenue stream, I think for the business while locking customers and on that hardware as well. But Axon uses immersive technology for training and whatnot with things like Axon VR, which actually uses headsets as a part of the curriculum. This is a business that's utilizing virtual reality and immersive technology to become better, to differentiate itself. I think not only with Axon but many companies you're seeing they're utilizing immersive technology as ways to educate and train, and that ultimately is a great feature of immersive technology.
Matt Frankel: I like Axon. We talked about the three big players that make the hardware, the products. Axon is another one that has a lot of potential there. There's a lot of applications for augmented reality and what they do, so that's an interesting one.
Jason Moser: Indeed. Well, we'll leave it there. Matt, thanks so much for joining us this weekend. It was great catching up with you again.
Matt Frankel: Always fun to be here. Hope we can do this again soon.
Mary Long: As always, people on the program may have an interest in the stocks they talk about and the Motley Fool may have formal recommendations for or against, so don't buy yourselves stocks based solely on what you hear. I'm Mary Long. Thanks for listening. We'll see you tomorrow.
