Magic Leap: Who Could Buy the AR Unicorn?

According to a recent article by Bloomberg, Magic Leap is essentially looking for a buyer. For the reader in a rush, we have extracted the relevant key sections from a Bloomberg article below:

Magic Leap Inc., the startup that raised more than $2 billion to build an augmented-reality device, is exploring options including a sale, according to people familiar with the matter.

The Plantation, Florida-based company is working with an adviser to consider strategic options that could also include forming a partnership or selling a significant stake ahead of a potential listing, said the people. Magic Leap could fetch more than $10 billion if it pursues a sale, the people said, asking not to be identified because the information is private.

Tech companies have been placing bets on the promise of augmented-reality products, which have also found uses in health care and other industries.

Magic Leap, which counts Alphabet Inc.’s Google and Alibaba Group Holding Ltd. among its largest investors, is gauging potential interest from large tech companies including Facebook Inc. and medical giant Johnson & Johnson, the people said.

An initial meeting between Facebook and Magic Leap never progressed to deal talks, according to a person familiar with the matter. The social media giant, already facing rising tariffs and coronavirus-related production pressures for its own virtual reality headsets, isn’t currently interested in acquiring Magic Leap’s business, the person said.

Omar Khan, Magic Leap’s chief product officer, said in an interview earlier that the company’s Magic Leap 2 product will be released next year and will help it build a consumer presence. He said he expects the company to develop a disproportionate share of the market, which he said will top $100 billion within a few years.

Led by Chief Executive Officer Rony Abovitz, Magic Leap has raised about $2.6 billion from investors and is valued at $6 billion to $8 billion, making it one of the most well-funded tech startups in the U.S. as it built a headset that could project digital objects onto the real world.

Among the company’s other big name investors are Japan’s largest wireless operator NTT Docomo Inc., Saudi Arabia’s sovereign wealth fund PIF, Singapore’s state-owned investment company Temasek Holdings Pte. and AT&T Inc.

Magic Leap lured investors with a promise to create a headset using spatial computing technologies that offer consumers high-end augmented reality experiences and tools to support remote working. Many big companies have been chasing the same technology, including Microsoft with its HoloLens device.

Magic Leap, founded in 2011, unveiled a $2,300 headset in 2018 after years of secretive work and has pledged to deliver technology rivaling television or the telephone in societal impact. - Bloomberg

What are the viable exit options?

The Bloomberg article says, according to anonymous sources, the company could potentially be acquired for $10 billion. Our analysis suggests that a $10 billion transaction is very unlikely! Firstly, because Magic Leap has not gathered momentum a la Oculus, which beforehand Facebook wrote the big check, hence there is a very little incentive for any deep-pocketed acquirer to pay such a premium price. Likewise, there is little commercial traction to justify the premium price, especially in light of the Covid-19 impact on the market that is forcing companies to preserve cash. Furthermore, some analysts suggest that Magic Leap might have more than 100K in unsold units of inventory! Compare that with a total of approximately 400,000 units of Oculus Quest, which Facebook was able to sell at $399 per unit versus Magic Leap’s $2,300 per unit.

Acquisition Scenario (90% probability): Price tag ≤ $1.2Bn

In this scenario, $1.2Bn is the maximum we predict that Magic Leap could get with the following companies:

Subscribers to our M&A Simulation Platform can have access to the full list of potential buyers that include Facebook, as well as their probabilities of buying.

A note on gaming unicorn Improbable

In our recent analysis of Andreessen Horowitz’s enterprise portfolios, Improbable scored a very low Kolmogorov IPO Score as shown below in our dashboard.

Despite making acquisitions to broaden its appeal and win over customers, Improbable has struggled to make major breakthroughs from a commercial point of view. As per available data, the company has £1.2m in total revenue in the year to May 2019 and over £60m in losses. Under the current environment with a climax of anti-unicorn hype, our analysis suggests the company does not have the numbers to raise a round at a higher valuation than the previous round led by SoftBank at around $2Bn. Hence, all indicate the only available options are either a down round or M&A! Of course, because the company raised a huge round last time (~ $500m) there may still be room for stretching the runway and so perhaps buy time to make enough progress to justify a higher valuation.

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