The Biggest Risk Facing Himax Technologies

By Chris Neiger Markets Fool.com


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Image source: Getty Images.

Himax Technologies (NASDAQ: HIMX) has seen its stock price fall 26% over the past 12 months. Some of that decline can be attributed to investors reacting too harshly to mediocre earnings reports or analysts' downgrades.But long-term investors are looking to thesemiconductor company's augmented reality (AR) technologies as the company's saving grace.

The Taiwan-based company certainly looks like it could be a key component provider to AR device makers, and Himax is betting that most of its future growth will come from this market. The company made 21.5% of its total revenue from its non-driver business (which includes AR tech) in the third quarter of 2016, and is expecting more growth in 2017 and 2018.

There are plenty of reasons whyaugmented reality might become a major computing platform in the near future, but Himax's focus on market could end up being risky. Here's why:

Augmented expectations

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The AR market is expected to be worth $90 billion by 2020, according to research by Digi-Capital. Facebook, Alphabet's Google, Snap, and other major tech companies are all pursuing AR with both hardware and software, but even as businesses invest in this growing market, there's certainly no guarantee that it will be as transformative or lucrative as they expect.

As a consumer technology, augmented realityis still in its early stages. It's likely still five to 10 years away from becoming mainstream, and even Digi-Capital (which is very bullish on AR) says thatit could be 2025 before the technology is pervasive to the degree that smartphones are now.

Theaugmented reality market is growing, but even by 2018, there is only expected to be an installed base of 100 million AR and virtual reality (VR) headsets worldwide. As Digi-Capital notes, that's just a small fraction of the size of the installed base of smartphones and tablets. In short, even if AR does turn out to be the next big computing platform, it still could take a long time for it to grow to the same level that mobile has reached today.

Now, to be fair, just becauseaugmented reality might get off to a slow start doesn't mean it'll be a failure. Nor does it mean that Himax won't benefit in the long run from its bet on the platform. The company is already working with 30 AR customers, and says that new hardware will go into production in late 2017 for a major one.

But we do have at least one key example from a major tech company that shows just how unpredictableaugmented reality can be: Google Glass. Back in 2013, a Wired writer wrote in article,"And here's the thing I am utterly convinced of: Google Glass and its ilk are coming. They are racing toward us, ready to change society, again."

That was three years ago, and today, none of us are wearing AR glasses, and most consumers still scoff at the idea of wearing them.Sure, there are examples of AR headsets being used for medical training, engineering, design, industrial maintenance, etc. But these are still niche uses, and not exactly good indicators of massaugmented reality adoption.

Why so serious?

I've been a bit critical of AR's potential in this article, but I do think it could become a transformational technology. The point I'm trying to get across is that Himax appears to bebetting a lot on AR's growth -- and if consumers don't respond to it as Himax hopes, then the company will suffer.

Himax Technologies has said that AR will increase its liquid crystal on silicon (LCOS)and wafer-level optics(WLO) revenue, and says that it "believes this is just the beginning of a long-term growth story." That might be true, but if the AR market takes too long to ramp up, or ends up fizzling out before it really gets started, then that long-term growth story might end up getting cut short.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Chris Neiger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Facebook. The Motley Fool has a disclosure policy.