Apple has postponed its augmented reality glasses due to technical challenges.
According to Bloomberg, Apple’s first mixed-reality headset is expected to be released later this year, followed by the introduction of a lower-cost headset as soon as 2024. In developing a lower-end headset that uses chips comparable to those in iPhones rather than the Mac-grade processors planned for the ~$3,000 enterprise headset, Apple hopes to be able to compete directly with Meta’s Quest Pro which retails for $1,500. Most of the company’s ~1,000 employees within its VR/AR-focused member Technology Development Group are working on the two mixed-reality headsets, while some teams continue to develop technology for standalone AR glasses. While Apple views lightweight AR glasses as a product that could eventually replace the iPhone, sources told Bloomberg the AR glasses were originally planned for launch in 2023 and subsequently delayed until around 2025. According to the report, significant technical challenges remain in developing the necessary battery and chip technology for the device. In addition to Apple, Google and Meta are allocating capital for research and development for AR glasses of their own.
Drew's Take:
Apple’s initial foray into the world of mixed reality devices is set to begin this year with the expected launch of its first mixed reality headset. Apple’s forthcoming headset is the tech giant's answer to the Meta Quest 2, the market leader in the nascent product category of VR. By some estimates, the call and response can be justified by the current size of the relatively small but growing market that is dominated by one player. According to an estimate by market research firm IDC, through the second quarter of 2022, the Quest 2 had cumulatively shipped 17.2 million headsets compared to 3.5 million headsets shipped by the rest of the market. As a whole, mixed reality headsets are clunky, heavy, and have remained a small product category that is out of reach cost wise for the average consumer.
Through its lower cost mixed reality headset option, Apple is well positioned to take the entire category to another level. While it is an appealing prospect for Apple to flip the current narrative of clunky, expensive VR and AR devices, the technology to build light weight, quality AR experiences is simply not there yet. However, as an industry leader in hardware product design over the past several decades, the company’s technological advancements in processing with the release of the M2 chip and its waist-mounted battery tech are promising windows into a future where Apple’s vision of effortless AR experiences ring true.
Investment Themes
Metaverse
Kambi introduced long-term financial targets.
At its Capital Markets Day Thursday, the B2B sports betting platform said it was forecasting EBIT of €150+ million by 2027 on projected revenue of two to three times higher than fiscal year 2022 levels. According to CEO Kristian Nylén, drivers to these targets include partner retention, rolling out third generation trading, and launching in a major, regulated Asian market. The company also projects their addressable market to expand from €11 billion in 2022 to €50 billion in 2027, €28 billion of which is through modularisation and €22 billion via turnkey and open platform. In a note, Jefferies analyst James Wheatcroft called Kambi’s 2027 financial targets “ambitious”, highlighting they are two to three times higher than current Jefferies expectations for 2025. Shares of Kambi closed the week higher by 3.4% in Stockholm.
Will's Take:
While Kambi has struggled with client retention in recent years as B2C operators like DraftKings and Barstool have opted for vertical integration, Kambi’s management sees a bright future for its outsourced backend offering. In particular, Kambi believes that the launches of new regulated markets and a more difficult macro backdrop will lead to a reversal in the insourcing trend. Kambi’s new 2027 financial targets are based on several key assumptions, including the launch of regulated sports betting in Texas, California, Brazil, and either India or Japan.
In addition to the expectation for new markets driving increased TAM, Kambi plans for technological advancements to improve its bottom line as its forecast for EBIT growth far surpasses anticipated revenue growth. Specifically, Kambi expects algorithmic trading “down to the XYZ coordinates of every player and every ball” to result in lowered human capital requirements. While investment in this kind of technological advancement will result in higher costs for 2023, CEO Kristian Nylén believes that full-blown algorithmic trading can vastly improve the company’s margin profile over time, in part driven by lower trading headcount. As we have discussed in prior newsletters, the online betting growth story consists of both domestic and international expansion.
Investment Themes
Sports Betting, iGaming
Nintendo is planning to increase production of the Switch to meet high demand.
According to Bloomberg, the company has told suppliers that it plans to produce more Switch units in the fiscal year beginning in April. The news comes after Nintendo lowered its Switch sales forecast for the current fiscal year last November to 19 million units from 21 million units due to component shortages. If Nintendo meets their current fiscal year goal and tops it next year, lifetime sales will be around 150 million units, a milestone only the PlayStation 2 has eclipsed among home consoles. With the six-year-old Switch nearing the end of its lifecycle, UBS analyst Kenji Fukuyama said “people will soon start speculating about next-generation hardware and are likely to refrain from buying the old system,” adding “a slowdown in Switch sales momentum is unavoidable.” Meanwhile, Toyo Securities analyst Hideki Yasuda believes a Zelda-themed Switch to accompany the upcoming game’s release may entice owners to purchase an additional unit.
Drew's Take:
Sustained sales of the aging Nintendo Switch has bucked the trend of handheld gaming consoles falling out of favor with consumers since the early 2000s. As noted above, prior to a next-gen console release by Nintendo sales typically slow, but without a new console announcement, that hasn’t been the case. In fact, the Switch could surpass the NES as Nintendo’s longest tenured flagship console, which currently holds the record at seven years.
Initially released in 2017, the Switch’s longevity is unusual. Of the top 5 best selling game consoles of all time, the Switch is the only console on the list that was released in the last ten years (PlayStation 4 is the second newest, released in 2013). It's also the only handheld-console hybrid to crack the top 5, doing so by surpassing sales of the Wii, the original Playstation, and recently both PS4 and Game Boy along the way. Due to the success of the Switch, the console that follows it will have a lot to live up to for Nintendo. In the interim, increases in production coupled with the prospect of special nostalgic game themed consoles on the horizon ensure that the Switch’s impressive run is far from over. As a result, Nintendo’s strength in hardware sales may shield the company from a broader downturn witnessed by pure-play game publishers.
Investment Themes
Gaming
Roblox reported 61.5 million daily active users (DAUs) in December, up 18% year-over-year.
In the company’s December 2022 key metrics report, Roblox also revealed hours engaged on the platform rose 21% year-over-year to 4.7 billion. For the month, estimated bookings were between $430 million to $439 million, up 17% to 20% year-over-year. Despite an upbeat reaction to the monthly metrics, Roblox fell Thursday following a downgrade to underweight from equal-weight by Morgan Stanley. The firm expects slower bookings growth for the video game company in the second half of the year and sees little near-term upside from advertising. Morgan Stanley noted they prefer Activision Blizzard and Take-Two Interactive within the video game sector.
Brian's Take:
After reporting strong December metrics highlighted by a record 61.5 million daily active users, shares of Roblox retreated after Morgan Stanley’s Matthew Cost downgraded the stock from equal-weight to underweight. Additionally, Cost trimmed the video game company’s price target from $27.50 to $24.00. While the stock has rallied 24.3% year-to-date as of Friday’s close, Cost says that any bookings acceleration exhibited in the first half of the year is now priced in, with slower bookings growth expected in the second half.
While it is impressive to see Roblox continue to grow DAUs, the gaming space is coming under pressure, as seen with publisher Ubisoft cutting its full-year guidance last week and CEO Yves Guillemot stating they are “clearly disappointed” with their holiday quarter performance. Despite continued strength in several of its KPIs, Roblox plans to stop providing monthly metrics reports following the expected March 2023 release in April.
Investment Themes
Metaverse, Gaming
Israeli mobile gaming company Playtika announced an $813.5 million offer to buy “Angry Birds” maker Rovio Entertainment.
The non-binding, all-cash proposal represents a 55% premium over Rovio’s closing share price on January 18, 2023. According to Playtika, this also represents an improvement over a previous offer submitted in November. Finland-based Rovio stated that they were not currently in talks with Playtika but would review the proposal. Playtika CEO Robert Antokol stated that they believe that “Rovio’s renowned IP and scale of its user base, together with [their] best-in-class monetization and game operations capabilities, will create tremendous value for [their] shareholders." Shares of Rovio soared in Finland on Friday, closing higher by 35.8%. However, the stock closed Friday at €7.70, well below the €9.05 offer price.
Will's Take:
While the video game M&A frenzy of the past several years has slowed materially, Playtika’s takeover attempt of Rovio suggests strategic deals could still be in play in the current environment. Playtika has a track record in successfully monetizing free-to-play mobile games, and likely sees great potential in the Angry Birds franchise. According to Cowen analyst Doug Creutz, "[Rovio] never really mastered the live service model of mobile monetization and as a result, was surpassed by its competitors despite the global popularity of the IP." Meanwhile, he believes Playtika could modernize the franchise’s monetization strategy and unlock value.
According to Bloomberg consensus estimates, Rovio is expected to generate roughly $60 million in EBITDA this year on $350 million in revenue. Based on the $60 million figure, Playtika’s all-cash offer represents a multiple of approximately 13.5 times 2023 EBITDA. This multiple is well higher than Playtika’s own valuation, and represents a very healthy multiple for a gaming company so heavily reliant on a single franchise. As per Rovio, more than 80% of gross bookings for the third quarter 2022 were attributable to Angry Birds. In aggregate, the aggressive multiple has a positive readthrough for other speciality game publishers, even as growth has stalled industry-wide.
Investment Themes
iGaming, Gaming
Innovative Industrial Properties reported defaults on some of its facilities.
The cannabis-focused real estate company said on Wednesday that three lessors were unable to fulfill their rent obligations at its facilities. Lease amendments were completed for three of its properties, exchanging limited base rent deferrals for cross-default provisions or an extension of terms. According to the company, as of January 18th, 92% of rent was collected for the month. Piper Sandler noted that some of the rent issues were previously discussed, though news of additional tenants struggling is concerning. Shares of Innovative Industrial Properties fell by over 16% Thursday, their worst day since February 2021.
Brian's Take:
Innovative Industrial Properties (IIPR) is unique as the only real estate company listed on the NYSE focused on the regulated U.S. cannabis industry. IIPR focuses on the acquisition, ownership, and management of properties leased to state-licensed operators for their cannabis facilities. Currently, IIPR owns 110 properties across 19 states with approximately 8.3 million rentable square feet.
As a real estate investment trust, it is vital that IIPR receives rent payments from its tenants in order to grow and maintain its quarterly dividend. Thus, this week’s news of three tenants defaulting on their obligations was received quite poorly by the market, evidenced by the over 16% decline on Thursday. Generally, IIPR has made progress in diversifying its exposure, as no single tenant represents more than 14% of its portfolio, while no state market represents more than 16% of exposure. However, with 8% of payments for January uncollected, there are concerns as to whether the defaults might be a sign of more things to come for a cannabis industry struggling with decreasing prices and margin pressures. In particular, the failure of SAFE Banking legislation has left smaller, undercapitalized cannabis businesses at risk.
Ironically, however, it might be a positive for IIPR that the SAFE Banking Act has not passed, as the company’s business resembles that of a lender. In essence, cannabis companies execute sale leasebacks with the REIT at premium valuations. Thus, the company is somewhat a marijuana bank, and an expansion of banking access for cannabis companies would mean IIPR’s business could come under pressure.
Investment Themes
Cannabis
Chart of the Week
In its first year of legalized sports betting, New York reported a record handle of $16.2 billion. Gross Gaming Revenue (GGR) was also a record at $1.36 billion.
FanDuel led all other sportsbooks in GGR, garnering a 48% share of total operator revenue.
