Motley Fool Hidden Gems Investing - “Maybe the Headset Isn’t the Way”

Episode Date: July 8, 2023

Immersive technology is more than goggles. Jason Moser and 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 Companies discussed: AAPL, META, GOOG, GOOGL, MSFT, ATVI, CDNS, AMT, AXON Host: Jason Moser Guest: Matt Frankel Producer: Ricky Mulvey Engineer: Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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Because we have your number. from reports that i've read met us having a lot they're not having trouble selling their their quest headsets i mentioned 20 million sold so far the overwhelming majority is the newer the quest two uh the quest threes due up later this year they're struggling with retention meaning keeping people engaged and i mean a lot of tech companies have a similar problem how many people bought a peloton during covid and now it's a coat rack um because yeah because engagement uh kind of fell off after a while, well, Meta is having a similar problem. 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. Matt, this week, we're jumping into the wide world of immersive technology. We got virtual reality, augmented reality, there's mixed reality. These are all certainly becoming more popular conversation these days. Today, we want to cover the latest in Apple's headset aspirations. We'll also talk about Meta's latest subscription offering. 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 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-looking piece of hardware. It's a great-looking 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? I think it's historically been a mistake to underestimate Apple fans' willingness to spend money. That's an evergreen thesis. It really is. 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 to 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 2 billion active Apple devices throughout the world. You need 0.1% of their their customer base to adopt this product. I do fully agree with you on that notion that you should never really underestimate what Apple fans will do. I've always said they could 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. That's the power of that brand. I'm really not even 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, you know, when you look at this versus something like Meta's Quest line,

right, formerly Oculus, but the Meta Quest line, I mean, the pricing is what really stands out to me. And I think we'd all agree, I mean, the Vision Pro of today isn't going to be the Vision Pro of 10 years from now, right? Or even five years from now. I mean, this is their first step. This is their playbook, right? Let others kind of get out there, test the waters, bring new hardware, new concepts out there, figure out what works and what doesn't work. And then Apple kind of jumps in there with its own interpretation of that hardware, of that software, and making it do what they think is most valuable. I don't think this is any different, honestly. But it does, you know, it's not like headsets are that new, right? I

mean, Meta's been at this for a while with Oculus. I mean, there's a lot of early adopters, right? And I mean, the price points for those Meta headsets, considerably lower. I mean, you're talking about something in that $500 to $1,000 range for a Quest headset, generally speaking, versus that initial $3,500 price tag for a 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, right? I think this is that tool that gets out there and really helps Apple build this spatial computing ecosystem. And 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. You know, Apple is also closing in on one billion subscriptions, and that is just extremely powerful. I mean, that is 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. And so, again, while they are slashing that guidance for the initial offerings. There's some tech supply issues. There's 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. So I have no doubt

that happens. I think the bigger question really is the use case, right? What do you find the real use case to be with something like a Vision Pro or even just headsets in general? Well, 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 movies, and 3D movies, and things like that. Instead of your TV, instead of your laptop, And 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.

And 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. So, I mean, Apple has that advantage. Apple's 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 bounds beyond even the Quest Pro from Meta in terms of just the technology. We'll see how it plays out. I believe I remember you being an iPhone user. Are you on

the waiting list for this? I am an iPhone user, and no, I'm not on the waiting list for a Vision Pro. I've got two kids to put through college, so this is definitely on the back burner for a little while. But I'm always fascinated by new technology. I mean, I wouldn't consider myself an early adopter, but I do like to get in there and tinker around with these things to understand what they are and the problems that they're trying to solve. And I think one of the interesting dynamics with the Vision Pro that is not reflected into something like the Quest, right, is the Vision Pro, it looks like it incorporates mixed reality, right? Augmented reality and virtual reality kind of into one experience. And those

are different, right? I mean, virtual reality being that submersing 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. And there are use cases for both. Quest historically has been a VR device. And so that, 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. And I think the other key for Vision Pro and for all of these headsets really is ultimately the form factor, right? It's the interface. And I don't know how long, if you've ever put any of these headsets on. I've not put on a Vision Pro, but I've heard the same

thing in regard to Vision Pro. They are very cumbersome after extended wearing, right? You put one of those things on for like an hour and you really start to feel it. And so, you do see the need for this form factor to change, for it to come. The size needs to be reduced. It needs to be a bit more seamless and a little bit more tolerable for longer periods of time. And I have no doubt that will happen, right? But it is going to take a while, right? I mean, the evolution of these things, it's going to take some time, because if you figure where we are today with the Quest, and I mean, 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,

right? I mean, it's just this big, cumbersome headset. So, I think ultimately the form factor needs to come down. And it does make me wonder, I think about this from time to time, I have to ask you, I mean, there's a part of me that's really starting to believe that maybe the headset isn't the way, right? Maybe that's not the interface that ultimately brings spatial computing to the masses. I mean, 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, then I think that changes everything. I don't know if they can get it to that. Maybe they can. But what do you think? I mean, these headsets in their current iteration today, it just doesn't seem like that's something that

allows for mass adoption. Well, I would bet the team at Google agrees with you, because they were developing the, remember the Google Glass that they were developing 10 years ago? Oh, yeah. That was essentially a pair of glasses. Yeah. The problem is the technology's 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, would be, you could be wearing one right now and I would have no idea because you're wearing a pair of glasses. If it could do everything that the Vision Pro is going to do. Google ended up discontinuing the glass actually this year after about a 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 they um the vision pro it's designed to be like you said an augmented reality not a virtual reality headset so in two years we could see people walking around the grocery stores wearing a vision pro um right now you don't you generally don't see people wearing the meta quest 2 uh walking around a grocery store or anything like that right now but that's absolutely a possibility with the vision pro yeah so the new reality might be people walking around or driving around even with these on their heads i reckon it's possible matt but i'm going to bet against it how about that well that's kind of the goal to to to complement reality instead of

replace it yeah um that would be better accomplished with something the size of a pair of glasses No question. Well, you take it to this next step. You talk about wearing these things outside of the home and overlaying the digital on top of the physical to bring more use cases in your everyday life. Driving, for example. We've got companies that are building windshields that incorporate this augmented reality technology. SANS headset. You don't need a headset to actually use these windshields. And so, that's kind of what makes me wonder in regard to these headsets. You know, 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.

So, it just does make me wonder. But again, I do, you know, listen, I know the form factor is going to come down, right? I know the size is going to become less and less of an issue as time goes on. And that's going to be a big, I think that's going to be a big piece to the puzzle there that should help not only Apple, but all headset makers. And speaking of all headset makers, I wanted to talk about Meta for a second here, too, because Meta, you mentioned, I think, earlier, just in regard to the Quest, the Quest serves a gaming population primarily. I think that's right. I think that's right for the most part. And Meta, really leaning into that, they launched a VR subscription service with their Quest line in order to really capitalize on that

population, right? I mean, this is a service, $7.99 a month, and it's really something that looks like it is catering specifically to that gaming audience. Yeah. And from reports that I've read, Meta's having a lot, 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, the Quest 3s due up later this year, they're struggling with retention, meaning keeping people engaged. And I mean, 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 kind of fell off after a while. Well, Meta's having kind of a similar problem, especially with the newer cohorts, like people

who got a Quest 2 for a Christmas present last year or something like that. They're having trouble keeping them engaged. Not only would this be a more 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. Yeah. Again, going back to really those core use cases. And I think that for headsets in general, what we've seen, an easy core use case that we've discovered is in entertainment. And I think gaming really is sort of the big part of that thesis there. And so, I mean, from that perspective, I mean, gaming is obviously one of

the larger market opportunities out there for investors to be digging into. It's also one where, I mean, we're seeing, I mean, a lot of companies trying to, you know, a lot of competitive jockeying in this space. Companies trying to really, really establish their position. I mean, we've got Microsoft trying to acquire Activision Blizzard. That may or may not work out, but, I mean, you know what kind of a powerhouse Activision Blizzard is in that space. I mean, Microsoft itself, I mean, technically, they still, you know, they still have the HoloLens, which is their version of the Vision Pro. But again, you go back to, I mean, it's tremendous technology. There are certain use cases where it's really proven very helpful.

I think healthcare is one. And I think that sort of 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. Yeah. That's what Apple's 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. Oh, yeah. They're very good at it.

Their ecosystem pairs really well together. People are willing to pay a premium for the Apple Watch, for example, because it pairs so well with everything else Apple. um and if they can accomplish that with the apple headset their the vision pro then then great um i i think that that's where they're trying to go um to move beyond just you know gaming applications like i mentioned to be a kind of laptop replacement um instead of buying you know 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. Certainly very possible. If it 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, but this is not the first ambitious price that has come from Apple. If it's anything like other product launches, they could do a good job of justifying it. Yeah. And 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, learning, learning, discovering the use cases, what they're doing well, where they need to shore things up. I mean, this is a company with more resources than most countries on the face of this earth. So, I certainly do not doubt they will give it their all. And I like your statement at the top of the show, you just cannot underestimate Apple.

I mean, they are so talented in what they do and they always seem to figure out a way, and the brand power there, a very loyal user base indeed. So, yeah, 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 sort of the obvious players in this space, right? 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 are help powering these headsets. There are companies that are capitalizing on the software, incorporating these types of experiences into their business models. So, 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 Cadence Design Systems. The ticker is CDNS. And Cadence Design Systems, ultimately, this is a company that produces the software, the hardware, the intellectual property that helps its customers build their electronic products, right? 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.

I mean, Cadence is a company that's helping all of this happen. And if you look at some of the customers of Cadence, I mean, we're talking about companies like Nvidia and AMD, Samsung, Microsoft, Marvell, even Qualcomm, to name a few. So, Cadence Design Systems, probably, a 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 take off. What's a company you've been following that you think offers an opportunity for investors? Yeah. So, mine's a great complement to Cadence Design Systems.

They're kind of more on the software side of things, and 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 electronic circuits that are in nanometers, you can't just buy a 3D printer and make a chip. You need very, very specialized equipment to do that, and that's where Applied Materials comes in. You mentioned the endgame 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 kind of keep up with what their customers need. It's already been a 10-bagger over the past 10 years. Great, a very profitable company, about a 30% operating margin. The semiconductor equipment industry is expected to roughly double in size by 2030 and they should be a very natural beneficiary of that. 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 one I think a lot of folks out there are familiar with, Axon Enterprise, ticker A-X-O-N. Axon Enterprise, they develop and manufacture and sell what they call conducted energy weapons or CEWs. Just think Taser. right? This is the Taser company. This is the company that sells the Taser brand here in the U.S. internationally. It's got the Taser side of the business, right? 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 in 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. So this is a business that's utilizing virtual reality and immersive technology to become better, to differentiate itself, right? And 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. Yeah, I like Axon. I think they're kind of like the, you know, We talked about the three big players kind of that make the hardware, like the products. Axon's kind of like 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. Indeed. Indeed. Well, we'll leave it there, Matt. Thanks so much for joining us this weekend. It was great catching up with you again. Yeah, always fun to be here. Hope we can do this again soon.

As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Mary Long. Thanks for listening. We'll see you tomorrow. Thank you.