Apple’s upcoming mixed-reality headset will be controlled with eye- and hand-tracking systems.
According to Mark Gurman of Bloomberg, Apple’s Technology Development Group has been working on the ~$3,000 premium headset for seven years. A core feature of the product includes “advanced FaceTime videoconferencing” as the iPhone creator aims to make a 3D version of its iOS. By using external cameras for tracking hand movement and internal sensors for monitoring eye movement, the headset will allow users to pinch to select on-screen items with no need for a controller. On the hardware front, Apple has worked with Sony to develop two ultra-high resolution displays for the device. The first iteration of the headset will be made from aluminum, glass, and cushions. In terms of battery life, the device will last roughly two hours per battery pack. Per Gurman, Apple may reveal the product as early as this spring, and in its first year, the company believes it will sell about 1 million units.
Drew's Take:
Apple’s efforts to make its mixed reality devices a success will likely borrow from one of the key characteristics that made the iPhone so successful — quality software. Historically, to cultivate its mobile user base Apple has focused on Apps, the App store and maneuverable software for developers. Recent reporting from the Information suggests that users of Apple’s mixed-reality headsets will be able to build apps in a low code environment via the Siri voice assistant. The tech giant knows all too well the importance of quality apps to growing a hardware device ecosystem, especially when the price tag of the upcoming headset is on the higher end, similar to the premium pricing on the iPhone.
In 2014, Apple released Swift, a programming language made specifically for Apple operating systems. Many of the apps available on the App store are written in Swift, and the language has spawned an entire ecosystem of specialized developers. What can Apple do next to entice developers? The answer may lie in no-code solutions that level the playing field for users to create their own simple apps. The no-code/low-code movement has been picking up steam in recent years with the rise of website builder platforms like Wix and Squarespace, and AI pair programming tools like Microsoft-owned Github which launched a “co-pilot” mode in 2021 that assists developers in writing code. Apple’s new headset has the potential to level the playing field for everyday users to create apps, and in turn incubate a vibrant app ecosystem rivaling the industry-leading Meta Quest’s catalog. Coupled with advanced eye-tracking technology, and rumored air typing features in a future iteration of the device, Apple has an opportunity to take the mixed reality headset category to the next level in 2023.
Investment Themes
Metaverse
BetMGM is expected to be EBITDA positive in the second half of 2023.
According to a business update from BetMGM joint venture partners Entain and MGM, the sports betting and iGaming operator generated net revenues from operations of $1.44 billion in fiscal year 2022, ahead of its previous guidance of $1.3 billion. Meanwhile, BetMGM reported an EBITDA loss of about $440 million, in-line with its forecast. Live in 25 jurisdictions with access to approximately 45% of the U.S. adult population, BetMGM accounts for an online sports betting market share of 13%, according to management. In markets where it was live on “Day One”, BetMGM claims a 20% share. The company anticipates continued growth in fiscal year 2023, and believes it is “well positioned to achieve net revenue from operations between $1.8 billion and $2.0 billion.” In support of BetMGM’s “stellar performance”, MGM and Entain expect to invest a combined additional $150 million in fiscal year 2023, bringing their total investment in the operator to approximately $1.25 billion in less than five year’s time. Shares of MGM and Entain are off to a strong start in 2023, up 22.3% and 18.2% year-to-date, respectively.
Will's Take:
Alongside the BetMGM update, JPMorgan reiterated its "Overweight" rating on Entain, citing the company’s attractive growth profile and potential takeover interest. As BetMGM rapidly approaches profitability on an EBITDA basis, discussions with MGM are expected to pick up once again. Specifically, a report last week from CFTN cited an industry source and investment banker suggesting deal talks between the two parties were likely to begin following the U.K.’s upcoming release of its Gambling Act whitepaper. The regulatory paper is expected to be released in late March, and is particularly relevant to Entain as the documents are expected to specifically address how the U.K. Gambling Commission regulates companies with overseas operations.
As BetMGM has firmly established itself as a top-three player in the U.S. market, it's abundantly clear that MGM seeks full control. A proposed transaction could either see MGM seek to buy out Entain from its 50% stake, or to buy the U.K-based operator altogether. MGM has shown a commitment towards being a global player in online gaming, as evidenced by its purchase of LeoVegas, and Entain’s profit-making assets throughout Europe may prove attractive in combination with BetMGM.
Investment Themes
Sports Betting, iGaming
Microsoft set new highs for Game Pass subscriptions, game streaming hours, and monthly active devices.
The record metrics come despite Xbox revenues declining 12% year-over-year in the company’s second quarter, with gaming revenues dropping 13%. Microsoft attributed the performance to decreased spending on first-party titles and lower monetization of third-party content, alongside difficult comparables. According to CEO Satya Nadella, Microsoft’s monthly active player count reached 120 million during the quarter. As engagement continues to climb, CFO Amy Hood noted during the company’s conference call that it expects gaming revenue to continue to decline next quarter in the high single digits and Xbox content and services revenue to decline in the low single digits. During the earnings call, Nadella highlighted that the company is still intent on closing its $68.7 billion acquisition of Activision Blizzard during this fiscal year.
Brian's Take:
According to NPD, U.S. game sales in 2022 declined 5% from 2021 to $57 billion while software sales declined 7%. While Microsoft saw gaming revenue down by 13% and Xbox content and services revenue decline 12%, the slowdown remains an industry trend rather than a company-specific issue. Microsoft’s gaming division also faced difficult year-over-year comparisons this quarter, as Xbox content and services revenue in the second quarter of fiscal year 2022 grew by 10% following the launches of Halo Infinite and Forza Horizon 5. Additionally, the declines in first-party content and lower monetization in third-party content were partially offset by growth in Game Pass subscriptions.
Video game analyst “Benji-Sales” made an important observation in regards to Microsoft’s gaming performance, noting that the 13% decline in Xbox hardware revenue is more of a concern. The Xbox Series X and Series S were released in November 2020. Not even three years into the console cycle, Benji stated “we really shouldn’t be seeing declines.” By comparison, Nintendo is planning on ramping production of its Switch console due to high demand. That being said, with Microsoft titles such as Forza Motorsport, Starfield, and Redfall all expected to be released this year, there is reason to be optimistic that 2023 could begin to turn the trend around for Xbox.
Investment Themes
Gaming
Caesars Digital generated an estimated revenue of $236 million to $238 million in the fourth quarter.
The approximate total represents a more than double from the fourth quarter 2021 where the sports betting and iGaming operator reported $116 million in net revenues. Following Caesars’ 8-K filing, Stifel maintained its “Buy” rating on the casino company, raising their price target to $68 from $63. Analyst Steven Wieczynski noted that they believe “the risk/reward in CZR is too compelling to ignore.” Shares of Caesar ended the week higher by 10.3%. Additionally, Stifel initiated coverage of DraftKings this week with a “Hold” rating and a price target of $15. Analyst Jeffrey Stantial caveated the price target by saying the stock could eventually be worth $40. The firm noted that while profitability remains several quarters away, DraftKings’ conservative guidance sets them up for a “steady beat and raise story.” DraftKings closed this week up 8.4%.
Will's Take:
Following exorbitant industry-wide marketing spend in 2020 and 2021, U.S. online gaming operators are starting to turn a profit. While FanDuel officially became the first operator to produce a quarter with positive EBITDA last year, Caesars (and BetMGM) are on the doorstep. According to a research note from Barclays, Caesars would have reported a gain for its Digital division in the fourth quarter if not for a single outsized wager on the World Series that went against the book. We previously highlighted this one-time event — large wagers from notorious bettor “Mattress Mack” on the Houston Astros — as negatively impacting Caesars and Penn/Barstool in Q4. In addition to nearly achieving profitability, Caesars Digital continues to grow at a tremendous clip, more than doubling its gross gaming revenues year-over-year. While 2023 may be slower due to a lack of expected state launches, meaningful GGR growth is expected to continue across the U.S. market for several years to come.
Investment Themes
Sports Betting, iGaming
Sea Limited is exploring a potential divestment of indie game developer Phoenix Labs.
According to Bloomberg, talks are only preliminary and a formal sale process has not begun. It is unclear whether or not Sea will be able to offload the Vancouver-based Phoenix Labs for more than the $150 million it acquired it for exactly three years ago. The Singapore-based Sea is seeking to cut costs and scale back its overseas footprint as it faces growing pressure from a growth slowdown in its gaming and e-commerce segments. In December, Sea froze salary increases for most of its staff and paid out lower bonuses as Founder Forrest Li emphasized profitability, warning this year may prove to be “even more challenging” than last. In November, Sea cut roughly 10% of its workforce. Shares of Sea are up 31.8% year-to-date, but are down 81.3% from their 2021 high of $366.99.
Drew's Take:
As questions about Sea’s growth prospects continue to mount, divesting from Phoenix Labs appears to be on the table. In 2020, the Canadian game studio was acquired by Sea’s digital entertainment subsidiary Garena less than a year after they released their maiden title, Dauntless. Dauntless is a free-to-play fantasy role playing title, available across all major home and handheld consoles including the Nintendo Switch, Xbox Series X/S PS4/5, and PCs through a partnership with Epic Games. Notably, Dauntless wasn’t released for mobile, an area in which Garena has formidable expertise due to its cache of free-to-play mobile games including Free Fire. Free Fire was the most downloaded mobile game of 2019, and with Garena’s international distribution capabilities, Sea likely visioned Phoenix Labs’ titles reaching similar heights.
Despite a number of seemingly complimentary synergies at play between the two firms, Phoenix Labs did not ultimately release a mobile version of Dauntless, and the studio’s newest title, Fae Farms, is available exclusively on the Nintendo Switch. It remains to be seen whether Sea’s shift in focus towards profitability will sway investors who are already skeptical of the Singapore-based company's increasingly wide net of business lines.
Investment Themes
Gaming
Curaleaf announced it is closing the majority of its operations in California, Colorado, and Oregon.
The “proactive” decision is part of Curaleaf’s continued efforts to streamline its business. While these markets have contributed to the company’s top-line growth, Curaleaf noted that they instead intend to “place a laser focus on cash generation in its core revenue-driving markets moving forward.” The multi-state operator is also consolidating its cultivation and processing operation in Massachusetts into a single facility. Additionally, Curaleaf announced that it is reducing its payroll by 10%, which when combined with other cost saving efforts, is expected to bring $60 million in gross-run rate expense savings in 2023.
Brian's Take:
Less than a month into 2023, we have seen layoff announcements from numerous companies, including Google, Microsoft, Amazon, Goldman Sachs, and more. Thus, it comes as little surprise that MSO Curaleaf is cutting its payroll by 10%, representing about 4% of the company’s employees. Combined with other cost saving initiatives, management expects to save the Massachusetts-based Curaleaf $60 million in 2023, exceeding its initial savings target by 50%. Meanwhile, California, Colorado, and Oregon contributed less than $50 million in revenue to Curaleaf last year. The company expects these market closures to be immediately accretive to its adjusted EBITDA margins while putting them on track for free cash flow generation of over $125 million this year.
The decision to exit nearly all its business in California, Colorado, and Oregon comes as all three states have suffered from falling wholesale cannabis prices due to excess cultivation capacity outweighing demand. Unlike limited license markets, these Western jurisdictions are highly-competitive and operators' success remains in large part contingent on interstate commerce legislation. Additionally, CEO Matt Darin noted “the current price compression caused by a lack of meaningful enforcement of the illicit market” prevented Curaleaf from generating an “acceptable return” on their investments. With the newly announced cost-savings, Darin is optimistic about the company’s prospects both domestically and internationally, adding they can now “devote greater resources to tangible growth opportunities in emerging markets such as Europe.” As we await further progress on the SAFE Banking Act and federal marijuana legalization, the potential expansion of U.S. MSOs into other markets such as Europe is an intriguing idea to explore additional growth.
Investment Themes
Cannabis
Chart of the Week
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Apple expects to sell 1 million units of its new mixed-reality headset in its first year, according to Bloomberg.
In total, IDC estimates a combined 12.8 million AR and VR headset shipments for 2023. By 2026, IDC forecasts that number will more than double to 31.1 million.
