After cleaning up the whole portfolio in part #1 it’s time to start adding some themes and stocks.
TLDR; The time for “XR” is now and were adding: Bentley Systems (BSY), Roblox (RBLX), Corsair (CRSR) and Matterport (GHVI) which join Unity (U) and Agora (API) under this thematic category.
What we call “XR” which we’ll say stands for “eXtended Reality” but that’s a term without specific meaning. It does cover what most people consider “augmented” or “virtual” reality (AR & VR).
Some of you might feel this is too “far out there” but I can assure you that commercial adoption is well underway and this will be a major area for our own investing over the next five to ten years. If it helps you can think of it as the third stage of the internet which started with 1) browsing and information sharing then 2) transactional capabilities around 1995 and we are now entering this third stage. It’s overly simplistic to put it this way but it may help to frame the size of the opportunity.
Although it’s been around for a long time it’s clear that we are seeing accelerating commercial adoption of these technologies – especially in the last two years.
Over Ten Years Coming…
First of all, we’ve been active in this space for a long time. Our first report called: RealVR – The Next Really Big Thing, was published in April of 2009. That was followed up by reports on demographics in May and then one covering the enterprise segment. I may convert these reports to pages here but for now, you can download the files here.
Clearly, we were early! But the world has evolved considerably since then. Enablers like NVIDIA (NVDA) have done very well over that timeframe with the shares going from $11.32 to the present $717.20. The opportunity now isn’t just in the infrastructure segment but also in the layers above – like software, content, and entertainment.
What’s different now versus 2009 is the level of processing power we have, the size and speed of our data storage, and the resolution and versatility of our capturing and rendering technologies. The digital tools have also “caught up” to the resolution of human perception – narrowing the gap between real and virtual experiences.
There is much more detail in the reports above so I won’t rehash the core drivers of the business. Let’s get to this growing section of the Model Portfolio.
The engineering world has embraced the concept of “digital twins” as a method to design, build and operate complex physical systems like buildings. Bentley Systems (BSY) is a software company that supports the design, construction, and operation of large infrastructure projects like airports, bridges, power plants, large buildings, utility networks, etc.
You can think about a digital twin as a virtual version of a physical system. What’s important now is the ability to create bidirectional linkages between the virtual and the physical versions so that they remain identical in real-time. The implications of the approach are profound not just in infrastructure but in others like medicine. You might enjoy listening to Keith Bentley, CTO of BSY, talk more about them and their future impact here: buildingSMART International Podcast Episode #11.
BSY is an expensive stock at $63 with a ~$18B valuation on $800M in 2020 revenues. It’s had a good consistent run from the IPO which was very unusual in that it was purely to provide liquidity for employees and not a traditional capital raise. At this valuation this should not be considered a short-term investment but rather a secure position in a new long-term commercialization wave of this technology. Industry position, execution and the management team make this the the primary play for us in this segment.
Digital twins beg questions about the input/output side of the virtual world. What about cameras and/or LiDAR technologies for sensing and representing the real world? What about 3D printers to create real versions of virtual designs? They all exist but so far I’m not ready to pick any of those as winners. One riskier name that might be added to this theme is Matterport (GHVI now to be MTTR on SPAC deal completion.)
I first heard about Matterport from friends of mine in the real estate business who told me they were all using their software to capture and upload all those “virtual walkthroughs” for new real estate listings. Thanks to the pandemic this became an essential component for every listing. But Matterport has bold plans to leverage their position into the infrastructure space. I would say as Bentley is to the industrial space, Matterport is working to be in the consumer/residential space.
Matterport is already in our SPACvest Model Portfolio but the deal should be approved at the upcoming shareholder meeting on July 20th. In addition to the common shares, Matterport also has long-term warrants with an $11.50 strike price. Matterport is still a very small company with $86M in 2020 revenue but they have a strong position and it’s a large market opportunity. The current $4B valuation can’t be justified on any fundamental basis but they already have quite a bit of strategic value and given time they can grow into it.
Corsair (CRSR) is a PC hardware maker which may seem like a stretch here. But in order to participate in this new world, it’s going to demand substantial compute power and specialized peripherals will be desirable. Corsair has a strong brand in this space that they can leverage to develop their business model and expand their margins. Investors who are valuation sensitive will appreciate that the market value of $3B is supported by $1.7B in 2020 revenue and there is even a PE ratio on this one (20x). As an aside, I bought one of these units about two years ago and while I am not a gamer, I know that responsiveness directly impacts productivity and I’ve never had to wait for my computer to “catch up” with me since.
Roblox (RBLX) sits on the other side of this spectrum with their business tied to games and individual creators (many of whom are very young) that illustrate the idea of a working “meta-verse” which you might consider an alternate world or virtual reality where you can engage and explore in ways that you might in a real world. It’s a little like a digital version of a casino or Disneyland.
So far this is the first company that has been able to build a real business ($1.1B of TTM) revenue in a space that many would have found laughable just a few years ago. You can revisit their entire investor day presentation here: Roblox Investor Day.
We added Unity (U) shortly after their IPO because they offer one of the few best-of-breed “engines” for the development of high-end interactive experiences like games.
Agora (API) made the list even though they have some overlap with Twilio (TWLO). But they do have a slightly different positioning that is skewed more to real-time interaction in gaming environments. They are also based in China which cuts both ways but on balance their ability to leverage their platform at home and globally is big.