Is Vuzix Stock a Good Buy? Probably Not.

As one ages, there’s a desire to leave the world a better place than you found it. While most jobs in finance don’t ring that bell, we always get a warm and fuzzy feeling teaching people how to become better investors as opposed to telling them what exciting stock to invest in. So, whenever we see a stock many people are asking questions about, we like to dig in and see what all the fuss is about. Vuzix Corporation (VUZI) happens to be one of those stocks.

Let’s talk a bit about augmented reality (AR).

The Reality of Augmented Reality

The original augmented reality investment thesis visualized a world where everyone owns a pair of glasses that augments the real world with virtual information. Google Glass was one manifestation of this vision. Imagine Google Maps overlaying directions to the grocery store onto your field of vision. As you walk through the grocery store aisles, products are overlaid with virtual coupons. No need to ask the fishmonger what type of fish that is, because it already has a virtual label.

While a whole slew of companies have developed smart glasses, the grand vision of consumer AR devices replacing smartphones hasn’t panned out yet. It’s not because the technology is lacking, it’s just that no company has been able to execute on the consumer vision.

On the enterprise side of things, AR is being monetized by companies like TeamViewer and PTC, both of which have found viable use cases combining IoT with augmented reality. Plenty of startups have also been making traction in industrial AR, but the progress Vuzix is making can best be described as slow. Nearly five years ago we profiled the firm, noting an interest from Intel (INTC), and a whole slew of products coming to market. Yet only now do we see the company actually gaining some traction.

About Vuzix Stock

If you’re an “industry leader” in some technology, then we would expect to see sizable revenues to match that claim. For Vuzix, only last year were they actually able to bring in meaningful revenues of $12 million (we consider anything above $10 million annually to be meaningful).

The above chart might show a promising growth trend, but the numbers are still weak. Over the past nine years, this $884 million company has brought in less than $50 million in revenue. Are they on the cusp of greatness, or is this yet another false start where revenues continue to stagnate?

What is Vuzix Selling?

The bread and butter of Vuzix’s value proposition are wearable hardware products, of which they have two main product lines.

• M300XL, M400, and M4000 Smart Glasses (M series) – The M400 is Vuzix’s work-horse Smart Glasses offering which began commercial production in September 2019. The M4000 included upgraded optics and began mass production in September 2020.
• Vuzix Blade® Smart Glasses – Blade Smart Glasses were introduced as a monocular system at CES 2018. Blade Upgraded entered mass production in the second half of 2020, and added stereo audio and an autofocus camera. 

The revenue segment called “Sales of Smart Glasses” comprises the majority of their revenues, and in the second quarter of 2021, amounted to $3.77 million, “primarily as a result of our M400 Smart Glasses,” said the company.

Just hours ago, Vuzix released Q2-2021 revenues for which “Sales of Smart Glasses” came in at $2.83 million, of which $2.39 million (84%) were attributed to M-Series Smart Glasses (the remainder was attributed to Vuzix Blade Smart Glasses). Revenues for the first two quarters of 2021 aren’t showing the continued growth we’d like to see from a product that customers can’t get enough of.

We know that no single customer accounted for more than 10% of revenues, and that the M400 retails for around $1,700. Back of the napkin math tells us no single order exceeded 140 units, which raises an interesting question. Just how desirable is a business model that relies solely on the sale of hardware devices to thrive?

The Vuzix Business Model

The market pays a premium for software-as-a–service (SaaS) business models for the same reason it values razor and blade models. Give the razor away, enjoy the high margins from selling customers blades. What Vuzix lacks in their business model are blades. The below statement from their latest 10-Q implies that they’re actually selling someone else’s software product under terms which are less than favorable.

In December 2020, the Company renewed its global non-exclusive master reseller agreement (MRA) for certain smart glasses software under which it committed to sell a minimum number of new software licenses in 2021, as well as the unsold remainder from 2020. 

What we have here is a company that – for the first six months of this year – derived 85% of revenues from a single product line. Even if they had a portfolio of hardware products contributing to revenues equally, the fact they’re so reliant on hardware sales places this company firmly off our radar. There are plenty of others who would disagree.

The ARK Effect

In December of last year, Vuzix Corporation stock was trading around $4 a share. Just three months later, the stock price skyrocketed to $28, an increase of +600%. The efficient market hypothesis would tell us there was absolutely no reason for such a price spike, which means we can eventually expect shares to revert to the mean.

It’s no surprise that Vuzix decided to make hay while the sun shined. In April, they sold 4,768,293 shares to the public at $20.50 per share with gross proceeds totaling over $97 million. Today, Vuzix has about $137 million on the books which should allow them to survive for quite a while.

Weeks after those shares were sold, the CEO of Vuzix was chatting on the ARK Invest podcast about the great opportunity that lies ahead.

The banter on display is exactly why we don’t speak to publicly traded companies. Yes, we know doctors in the great country of Africa can benefit from telemedicine. Yes, we know nobody wants to look like they stepped off the Starship Enterprise (how many times is he going to say that?). Yes, we know that Vuzix is perfectly positioned to do the pandemic pivot.

It’s no secret that when ARK does something, investors react. It’s called “the ARK effect” for a reason. When ARK paints such a positive picture of Vuzix, should we be surprised that shares are overpriced? In a June letter to shareholders, the CEO mentions this interest, and also says:

I am very pleased to report that our Company’s market valuation has lately begun to reflect Vuzix’ strong intellectual property development and leadership position in the market.

Everyone has a portfolio of patents, but the company with the largest legal team usually comes out ahead. Vuzix sold $10 million of smart glasses in 2020 which is great. They have a long way to go before they can start talking about having a leadership position. The same letter talks about strategic initiatives, one of which is to “increase our software development team and our level of software-as-a-service (SaaS) business.” We’ll be interested to see how that develops over time, and look forward to seeing that segment reflected in their revenues.

Is Vuzix a Good Stock to Buy?

If you’re asking Google that question, and plenty of investors are, then this isn’t the stock for you. You might find some article where someone tells you to buy Vuzix shares, but they aren’t going to be there to tell you when to sell them.

The first thing to do is stop taking advice from Google and learn how to make your own investing decisions. Set some rules. For example, we don’t buy stocks under a $1 billion market cap. That’s a great rule to adopt, because most firms of that size have meaningful traction (unless they’re being hyped of course). The second rule we follow is to not buy stocks where our simple valuation ratio exceeds 40, no matter how great a growth story they have. Here’s that ratio based on what the bag holders paid back in April:

• $1.3 billion market cap / 0.016 billion annualized revenues = 81

And here’s where the ratio sits today based on Q2-2021 revenues annualized, and their market cap at market close:

• $0.884 billion market cap / 0.012 billion annualized revenues = 73

We won’t touch a company with a ratio over 40, no matter how compelling the growth story is. We’d like to see Vuzix demonstrate some consistent quarterly revenue growth to show their traction extends beyond initial orders of a new hardware product. Just because there is demand doesn’t mean Vuzix can successfully scale their hardware production to match it.

Our third rule is to only buy companies that have meaningful annual revenues, a number we’ve set at $10 million. Vuzix exceeded that number in 2020, but not by a whole lot. For the first half of this year, they’ve cleared $6.8 million in sales. Assuming they can maintain that, 2021 revenues would come in at $13.6 million, a respectable growth rate of about 17%. No matter what growth rate they might manage, shares are just way too richly priced for a risky hardware business.

Conclusion

When shares of a stock soar because institutional investors show interest, that doesn’t affect the underlying thesis. When 95% of money managers can’t beat the market over the long run, the old adage of “following the money” becomes questionable. Vuzix is richly valued and trying to sell hardware devices without an obvious recurring revenue stream to accompany them. We’re on the sidelines, and will check back in a year to see if they’ve made progress developing the SaaS part of their business model.