3 Top Augmented Reality Stocks to Buy in 2017

The augmented reality (AR) market, which includes products that project digital overlays atop real world images, is often overshadowed by the virtual reality (VR) market.Yet tech M&A advisory firm Digi-Capital still believes that theAR market will grow from nearly nothing today to $90 billion by 2020, compared to just $30 billion for the VR market.

The firm believes that although the AR market will be fragmented among products for various entertainment, enterprise, and e-commerce purposes, it will reach more users than the VR market, which will be primarily focused on gaming and video.

Image source: Getty Images.

There aren't many publicly traded "pure plays" on the AR market today, but investors can take a closer look at three companies that may benefit from its future growth -- Microsoft (NASDAQ: MSFT), Himax Technologies (NASDAQ: HIMX), and Apple (NASDAQ: AAPL).

The innovator: Microsoft

Microsoft's biggest investment in the AR market is the HoloLens, a "mixed reality" headset that projects digital images onto real world surfaces. In previous demos, Microsoft showed that the HoloLens could be used to play games like Minecraft on coffee tables, enable retail customers to virtually test out products that aren't in the store, and even "teleport" another personinto the room via a holographic projection.

The HoloLens isn't prepped for a commercial launch yet, but Microsoft has already sold "thousands" of $3,000 development kits to early adopters. The upcoming Windows 10 Creators Update will also add 3D image capture andediting tools to the OS, which will enable developers to create 3D objects that can be viewed in the HoloLens. Microsoft's upcoming VR headsets, which will be developed by hardware partners, will also utilize similar voice and gesture commands as the HoloLens -- so they could be considered "training wheels" for the headsets.

Image source: Microsoft.

AR won't become a major revenue driver for Microsoft anytime soon, but HoloLens and the Creators Update could eventually make Windows a major platform for next-gen AR apps.

The supplier: Himax Technologies

Himax is a Taiwanese supplier of display drivers for monitors, tablets, and smartphones. But in recent quarters, Himax has aggressively expanded into "non-driver" components for AR, VR, and 3D-sensing devices. In particular, Himax's LCOS (liquid crystal on silicon) products use highly reflective liquid crystals thateither reflect or block light for clearer digital images -- which make them ideal for AR and VR headsets.

In 2016, Himax's non-driver revenues rose23% annually and accounted for 20% of its top line. That growth offset softer sales of its display drivers for tablets and phones, and boosted its full year revenues by 16%. However, analysts expect Himax's revenue to fall 3% this year due to weaker seasonal demand for display drivers and lower revenues from its AR/VR-related businesses.

Despite that hiccup, which was likely caused by AR/VR demand coming in below market expectations, some analysts remain bullish on Himax's long-term prospects in these next-gen markets. Nomura Securities, Morgan Stanley, andNorthland Securities all recently upgraded the stock, citing the growth potential of its display drivers among newer TVs and growing demand for LCOS products for AR/VR devices. Many analysts also believe that Himax will provide a 3D-sensing chip for this year's iPhone. Mizuho estimates that the iPhone design win couldaccount for5% of Himax's 2017 earnings and 15% of its 2018 earnings.

The wild card: Apple

That brings us to the unlikely third pick, Apple. Apple clearly needs to diversify its top line away from its core iPhone, iPad, and Mac businesses, and many analysts have speculated that the company's next big hardware product will be an AR device.

In addition to Himax's rumored 3D-sensing chip for the next iPhone -- which could enable it to project AR overlays on surfaces like the HoloLens -- Apple has aggressively expanded into the AR space over the past few years. It acquired AR/VR firms like Metaio, Faceshift, Emotient, and Flyby Media. It hired leading experts like Doug Bowman, a former Virginia Tech computer science professor who is regarded as one of the top VR experts in the country. It filed several AR/VR patents whichdepicted an AR headset accessory for the iPhone, and reportedly assembled a special team to handlea secret AR/VR project.

These moves all suggest that Apple will enter the AR market in the same way Alphabet's Google and Samsung entered the VR market -- by making the smartphone the "guts" of cheaper headsets like the Google Cardboard and Gear VR. However, creating a phone-based AR headset could be much harder, since the user must clearly see the outside environment via a camera. Regardless of what Apple's true plans are, the company could soon surprise consumers and investors with a next-gen AR device that boosts the market's mainstream appeal as the iPod, iPhone, and iPad all did for their respective markets.

Take the long view...

The AR market is still a young one, and it may or may not live up to analyst expectations. Nobody expects AR tech to move the needle for Microsoft, Himax, or Apple anytime soon, but it's a fascinating adjacent market that could grow in importance over the next few years.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Leo Sun has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool has a disclosure policy.