Vuzix Looking to Replicate Its Commercial Augmented Reality Success in the Consumer Sector

For a long time, Vuzix Corp. (VUZI, Financial) has been the king of the industrial augmented reality sector in the U.S. The company's products are used in a wide range of industrial and commercial settings nationwide, spread across a variety of use cases with great effect.

Now, however, the company is attempting to take the plunge in the consumer market. This is a notoriously tough space to crack, as illustrated by Alphabet Inc.'s (GOOGL, Financial) failure to successfully launch its Google Glass product, despite a huge amount of initial fanfare and media coverage. Against a backdrop of this notoriety, then, what makes Vuzix think it can succeed where Alphabet failed?

Further, and just as importantly, does the company's attempt to enter the consumer AR space represent an opportunity for an investor looking to pick up an exposure to the augmented reality space?

Let's try and answer these questions.

But first, a brief introduction to the space.

Augmented reality (as defined here) is:

"A live direct or indirect view of a physical, real-world environment whose elements are augmented by computer-generated or extracted real-world sensory input such as sound, video, graphics, haptics or GPS data."

Many reading will likely already have come across this technology in some form or another. Android phones allow users to hold up their cameras to certain buildings or landscapes and see information overlaid on their screens. Things like Snapchat's filter masks are also (albeit novel) examples of this technology.

Right now, it may be a relatively nascent space, but it is already a large market and one that is growing fast.

According to reports, the augmented reality market was valued at $2.39 billion in 2016 and is expected to reach $61.39 billion by 2023, growing at a compound annual growth rate (CAGR) of 55.71%.

Companies are recognizing this and – as illustrated by Apple Inc.'s (AAPL, Financial) sharp focus on using augmented reality technology in its latest iPhone X device and the company's plans to release an augmented reality headset to facilitate the adoption of the concept – are allocating large amounts of time and cash resources toward trying to direct a portion of the above-mentioned market revenues toward their own balance sheets.

So where does Vuzix come into the picture?

The company, as mentioned, has long been an established player in the commercial augmented reality space. Its M300 smart glasses are used in a variety of industrial settings, enhancing human workflow by streamlining things like warehouse picking, stock checking, distribution, all those sorts of workplace-type practices.

This is an obvious market for a technology like augmented reality. The latter can be used to achieve direct and quantifiable cost savings in a commercial setting, making the products Vuzix sells, like the just mentioned M300s, an easy sell.

The consumer space, however, is a much tougher sell.

Individuals are going to buy augmented reality smart glasses because they are interesting and make life easier – not because they want to stack shelves more efficiently. As Google found out, persuading consumers they need this technology in their lives is not that easy.

What makes Vuzix think it can do what Google could not?

Well, a look at the device Vuzix is bringing to market, called the Blade 3000 smart glasses, suggests the company has picked up on a few areas in which Google went wrong and, specifically, the elements of the Google Glass device that turned potential consumers off to the technology, and refined them to address consumer concerns.

The image below illustrates the design of the glasses:

Image one (source)

The first most notable difference between this product and the Google Glass is it is double lensed with a full rim. This allows the smart glasses to take on an appearance much closer to traditional glasses (or sunglasses), making them far less discernible to passers-by. As Google found out, it was not necessarily the wearer that had issues with its Glass device; instead, it was those interacting with them (people did not want to be filmed or photographed without being aware of it). The likeness of the Blade 3000 to standard eyewear decreases the likelihood of other people identifying it as a smart glasses device, meaning wearers should not experience the high degree of stigma that grew to become associated with Google Glass wearers.

In line with this, the camera is hidden behind the left eye lens. This removes a large portion of the passer-by-intrusion type concerns that ended up dooming the Glass to the failed hardware pile.

Outside of these comparisons to Glass, the hardware built into the Blade is strong. The product has Waveguide optics built in (meaning a much improved and much clearer field of vision, as well as a decreased necessity for a wide lens and frame profile) and an integrated HD camera, head-motion tracker, touchpad, tactile haptic vibration feedback, built-in noise-canceling mics with speech recognition and built-in batteries.

Markets are yet to see what the Apple augmented reality headset will look like, but there is a good chance the company will go for something far closer to the Vuzix product than the Glass device, given the latter has already demonstrated how not to approach this market.

So what does this one look like from an investor's perspective?

Whether Vuzix will be successful in its attempt to crack consumer augmented reality remains to be seen, of course. As an investor, however, there exists some degree of risk mitigation in the sense the company is already an established player in the commercial space and – right now – it is this latter space from which Vuzix derives the majority of its revenues.

With this in mind, then, an investor can look at the Blade 3000 as a sort of calculated moonshot. That is a shot at a multibillion-dollar market with a device that has been built with the pitfalls of other failed devices in this space in mind, which, if things work out as Vuzix hopes they will, could quickly bring in multiples of the company's current top line. A spate of award wins at the International CES Innovation 2018 awards reinforces the argument this product really does have the potential to crack a market in which others have struggled to gain traction.

At the same time, if things go against the Blade 3000 and the device joins Google Glass on the list of failed attempts to crack consumer augmented reality, the downside of failure (in terms of the company's ability to continue to grow long term) is limited.

Outside of the Blade smart glasses, a spate of recent developments has served to boost market capitalization over the last 14 days. The company announced last week it has reached 350 commercial pilots in 45 countries for its M300 headset and that this technology (as well as certain aspects of its wider product portfolio) is covered by a patent portfolio that has increased by 53% over the past 12 months.

Third-quarter financials also recently hit press, with the company recording more than $1.4 million in revenues for the period, an increase of 141% compared to $582,549 for the third quarter of 2016.

Bottom line: this is a company that has worked hard to establish itself as a leader in a nascent space and, from a commercial perspective, it has done exactly that. Right now, however, all eyes are on the Blade smart glasses and their potential in the consumer space. If Vuzix can replicate its industrial success in the consumer technology side of the market, the company is very much one to watch during the coming five years.

Disclosure: The author has no positions in any of the stocks mentioned in this piece.