Investing in the Matrix? Augmented and Virtual Reality Show High Investment Potential
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Investing in the Matrix? Augmented and Virtual Reality Show High Investment Potential

Want to visit Pyramids of Giza but scared of flying? Your biggest dream has always been to play on stage with Bruce Springsteen? Would like to see how your hometown looked 300 years ago? Now you can have it all without leaving home thanks to virtual reality (VR). The market for virtual and augmented reality (AR) is gaining momentum faster than we recently thought thanks to the global success of Pokémon Go.

Virtual Reality – The Next 'Mega' Tech Theme?

Virtual reality allows users to experience things that are not achievable to most of us in real life (walk on Mars, anyone?) by using high-performance computers combined with sensory equipment (like gloves and headsets). For now they are mostly associated with powerful PCs, but mobile VR is also gaining importance.

Thanks to the fact that over 45 percent of society all over the world is connected to the internet (more and more often through mobile devices), and the use of internet platforms is growing fast, the market for developing mobile VR and AR is very large.

The Credit Suisse Research Alert authored by Uwe Neumann and Ulrich Kaiser quotes research company Kzero Worldwide as estimating that in 2014 there were around 200,000 users of VR and in 2018 there will be about 170 million of them – that is 85,000 percent growth. "We believe that the market for VR hardware and software might increase to the size of the current smartphone market (USD 600–700 bn) and at the same pace like the latter witnessed during 2001–15,"  Neumann and Kaiser state in their report.

In 2015, Piper Jaffray issued a report, "The Next Mega Tech Theme is virtual reality", in which researchers claimed that both VR and AR are the next mega tech trend through 2030. "We liken the state of virtual and augmented reality today as similar to the state of mobile phones 15 years ago," they said, "The first phase will be virtual reality, the second phase will be augmented reality."

Source: Company reports, Credit Suisse estimates, Gartner

Pokémon Go Gave It a Go

This summer we saw the first widespread breakthrough in AR: people were crowding with their phones under bridges, in restaurants, and on stairs of museums trying to collect the virtual creatures in real life settings. "'Pokémon Go' is hugely helpful in terms of awareness of AR among both consumers and the broader investment community," says Tim Merel, founder and CEO of Eyetouch Reality and Digi-Capital. "It could have far-reaching repercussions beyond games, both in terms of what developers do next and where investors focus their attention."

What are other possible uses of augmented reality besides getting people out of their homes in search of Pokémons? AR applications can augment travel experiences in the sense that they can make them fuller and more vivid. When used for sightseeing, AR glasses may display past urban design or reconstructions of historical events. It is also possible to see comments made by previous visitors ("Don't go to that restaurant! They charge you 20 euro only for the table" or "You have to see the sculpture at the back of the cathedral"), and learn about current events and points of interest in the area.

Though for now both virtual and augmented reality systems are used mainly for entertainment, this is going to change as there are many more exciting potential use cases. "We will see the practical uses for consumers, businesses, health and education providers extend far beyond Pokémon Go in the next few years," says Angus Muirhead from Credit Suisse Asset Management, Zurich.

Not Only Games

The University of Louisville offers phobic patients a therapy using VR headsets to allow them experience the anxiety causing situation (like public speaking or seeing a spider) in a controlled and safe environment to help them overcome their fears. Psychiatry is not the only field of medicine which uses the latest technology. AR glasses can remind patients to take medications or check their sugar levels.

The systems are also used in education. Doctors- or pilots-to-be can gain some experience in virtual reality without the consequences of failure in real life. Engineers have also started using VR sets. Not only can they check the influence of weight, winds or temperature on their constructions (bridges, vehicles or buildings), but they can also present the final product to investors and management before the launch.

Augmented reality should add, for example, precision to navigation systems: Pilots can be shown alerts, paths to follow or potential barriers which can appear on their way. Car drivers could have driving directions or traffic information displayed on their windshields. "In our view, AR and MR hardware/services could have a much broader scope in the long term," Neumann and Kaiser claim, "It could even disrupt or replace the smartphone market."

Long term outlook for virtual reality market

Long term outlook for virtual reality market

Source: Citi Research, Credit Suisse

Investment Opportunities

There is still much to be achieved in the field of virtual and augmented reality, hence there are many investment possibilities. "For the last 20 years a number of fantastic enabling technologies have been developed," says Angus Muirhead, "and now we are starting to see the fruits of this innovation as all of the  pieces are being brought together to deliver some very powerful applications using virtual and augmented reality, robotics and artificial intelligence, and cloud computing and big data." Neumann notes that Credit Suisse's Equity Research Department published a report on the VR/AR theme in February this year, the first of its kind in Switzerland. Both the software companies and those producing the VR/AR hardware such as glasses, treadmills, or gloves are worth having a look at. Also, "semiconductor products such as Microprocessors (MPU) Graphics chips (GPU) and memory could expect incremental demand."

While there are lots of startups developing products based on VR and AR, most of them are private and early stage companies. Investors can of course invest in large, established companies like Facebook, HTC, Sony or Microsoft which are developing VR and AR technologies. However, investing in these means investing in large companies which are also involved in many other areas of technology, with perhaps only a few percent coming from VR/AR. "A sensible approach for most investors would be to buy into a fund which is exposed to the theme," advises  Muirhead, "This provides you with greater diversification than owning individual stocks, and ensures that an expert has selected what he thinks are the best investments to play the theme."

No matter how excited you get about the opportunities to invest, do not lose yourself in either virtual or augmented reality. In Silicon Valley, the idea that we are already 'trapped' in the Matrix seems to be gaining popularity!