When you hear the words virtual reality or augmented reality, your mind likely turns to gaming. You envision a person standing in an open area wearing blinders, swinging their arms wildly in different directions. That’s not far from the current reality. But the market is still in its infancy, working through problems like latency issues and insufficient resolution.
While a number of big names are working in the space — Samsung Group, Sony Corp (NYSE:SNE), Microsoft Inc (NYSE:MSFT), Huawei Technologies, ZTE Corp, Facebook Inc (NASDAQ:FB), and Alphabet Inc’s Google (NSADAQ:GOOG) (NASDAQ:GOOGL) — it’s smaller specialty companies focused on VR, AR, and display technologies like Kopin Corp (NASDAQ:KOPN) that may offer the greatest opportunity to investors for growth.
The virtual reality market is expected to hit $10.7 billion by 2020 with a VR and AR user base growing 10 times by then. Despite this huge potential market, the leaders in the space, Google and Facebook, offer products that are basically free or have set the bar so low that very little advancement is needed to exceed it.
The market doesn’t begin and end with gaming. Cinema content is expected to make a push into augment reality as well. If you’ve been to a Cinemark theater recently, you may have noticed the litany of AR games moviegoers can play on their phones in conjunction with the movie screen before the show starts. The potential size of this market ranges from several hundred million into the tens of billions. Simply put: The potential of the cinema is huge, although monetization has only begun, so it's not only an untapped market, but also an unknown market.
How does Kopin fit into this market?
Kopin develops optical and audio components for manufacturers of AR and VR equipment. This includes display technologies as well.
On a smaller legacy scale, Kopin also produces Family of Weapon Sights (FWS) programs — enhanced sighting technology — for F35 fighter jets. The company is the sole supplier of displays for the helmets worn by pilots in the F-35 Joint Strike Fighter jets. Recently, Kopin received an order for $2.6 million in displays that will run from January 2019 through July 2019. They also received $4.2 million in orders related to the FWS-I program, which provides digital eyepiece modules used in imaging rifle sights.
It’s from this defense work that Kopin has been able to evolve the display technologies into a broader range of consumer-driven products.
Current product development focuses around Kopin’s Whisper Chip and various OLED micro-displays.
The Whisper Chip
The Whisper Chip creates automatic speech recognition even in noisy environments. It allows consumers to use voice rather than touch when operating an augmented or virtual reality system.
Kopin is working with GoerTek Inc – a Chines acoustics company – to jointly develop and commercialize one virtual reality headset along with two augmented reality headsets, one enterprise and the other health and fitness. The company will contribute technology and components for voice and lighting. As part of the deal, GoerTek also acquired a 10% position in Kopin at $3.25 per share.
The OLED microdisplay brings 4 million pixels to a one-inch display, allowing for a compact, low-power solution with little latency. It features a high resolution, low-power, small-form-factor display while being protected by 10 patents. The OLED-on-silicon microdisplays consist of two key elements: silicon backplane and OLED emissive layer.
The manufacturing operations for the company on the OLED microdisplay have been outsourced to dedicated foundries, while the design expertise of components resides within Kopin. This creates the first fully-fabless (outsourced fabrication) OLED microdisplay business model allowing for high-net-margin potential with low out-of-pocket expenses.
Kopin currently holds partnerships with Lenovo and GoerTek, the latter of whom supplies to Samsung, Sony, Microsoft, Huawei, and Xiaomi. The company isn’t seeking to directly compete with all these names, but rather supply components through fabless (outsourced) production.
While the Whisper Chip gets buzz, Kopin’s real strength lies in its visual component.
Insufficient resolution will create blurry pictures. In order to generate user immersion, 4 million pixels are required. Kopin already debuted its OLED microdisplay that offers a 2048 x 2048 resolution on a one-inch diagonal size micro-display. That’s 4 million pixels across one single inch. The screen operates up to 120 Hz with low power consumption.While the list of competitors exists and VR products have already hit the market, the patented Pantile optics (magnifying lenses) will allow smaller and thinner VR systems estimated to be less than half the size of the commercial VR headsets like the Oculus Rift, HTC Vive and the one from Sony’s PlayStation. Kopin’s microdisplay can achieve all this with almost zero latency (10 milliseconds) for the total immersion experience.
The result is total immersion with low power consumption, near-zero latency and a more compact product offering. Kopin already announced it has shipped 5,000 display modules to a Tier One US internet company for soon-to-launch augmented reality smart glasses.
Kopin has been able to uniquely adapt its display technology beyond defense applications and gaming into wearables for motorcycles, athletes, and medical professions.
SKULLY Technologies recently introduced a “smart helmet” for motorcycle drivers that incorporates Kopin’s microdisplay and optical technologies. The helmet includes a rearview camera, heads-up display, in helmet turn-by-turn navigation, and audio and smart voice controls.
HMD/MD, a company led by a team that commercialized the first FDA-cleared head-mounted display for surgeons, recently entered into an agreement with Kopin to develop the next generation of head-mounted displays (HMD) for medical and surgical applications.
Kopin has also teamed up with TrainPeaks LLC to introduce Kopin’s SOLOS Smart Glasses. These glasses provide the user with visual and audio prompts for structured workouts. Real-time performance data such as duration, intensity, and compliance are communicated so athletes, specifically cyclists and runners, do not have to take their eyes off the road or break stride. Not only does it help performance, but it also boosts safety levels.
Kopin by the numbers
Kopin’s financials don’t wow like their products — at least not yet.
The company lost $9.8 million on $5.1 million in revenue in the third quarter of 2018. This equates to $0.13 per share.
Management noted Chinese tariffs have had an impact on business, as well as the market’s ongoing assessment of virtual reality.
While the losses jump out on paper, the viability of the company isn’t a concern.
Kopin has no debt and holds $46.2 million in cash, around $0.65 per share, about 40% of its current market cap.
The company showcases more than 300 patents and patents pending, 11 granted in the third quarter and three new applications. Additionally, Kopin has aggressively expanded relationships with several large companies like GoerTek and Lenovo, to create commercial products in the space.
The company still draws revenue from its F-35 fighter jet and FWS military programs, but with multiple potential revenue streams on the horizon, that could change.
The Bottom Line
The AR and VR ecosystems are growing and changing rapidly in gaming and cinema. Barrier to entry is low for the end-market, but in terms of design and internal components, barrier to entry is high and clients should become sticky for Kopin. Headsets utilizing Kopin technology could be much smaller than current headsets using other technology, so changing internal components away from Kopin’s will be costly and difficult for customers.
Rather than putting all its hopes in the gaming market, Kopin has branched out into other areas that can benefit from heads-up display technologies, such as medicine, vehicles and athletics. This diversification will keep Kopin on in your sights as the AR and VR industries continue to evolve.
--At the time of publication, Tim Collins had no positions in any of the stocks mentioned.
--Follow Tim Collins on Twitter: @retrowallst and @darknovelisttim