As hardware companies rush to market with their first generation virtual reality headsets, the minds behind EVR Holdings (LSE: EVRH) believe they may have struck gold due to the relative lack of content for these devices.
EVR's plan is to make audio and visual recordings of concerts in high definition and then release them on its MelodyVR app. The company has already signed a framework agreement with major record labels Sony and Universal Music Group and is building up a catalogue of thousands of concerts, including from some hugely popular acts.
On the distribution and marketing side there will be assistance from a recently signed agreement with Microsoft that will see the Seattle tech giant invest cash and expertise into building the app while also marketing the MelodyVR name across its Windows devices.
Understandably, investors have become quite enamoured with the idea of getting in on EVH at the beginning. That's why the company's share price has risen over 120% in the past year alone.
However, there are a few issues that would-be investors should be aware of. For one, the company's MelodyVR app isn't even released to the public yet. The blame for this doesn't lie with the company though as it's waiting for the actual VR hardware to improve enough that it's library of concerts will actually appear in high definition as they were recorded.
Of course, without an app that is selling access to these concert recordings, the company receives no revenue. And as it races to position itself as the market leader before competitors can take that crown, investments must be made. Indeed, in the half year to June operating, losses rose to £2.6m, the same amount lost in all of 2016. The company does have £6.5m cash on hand following a recent rights issue but investors shouldn't be surprised if they're tapped for funds again, especially if VR hardware improvement is slower than hoped.
EVH has a compelling investment case but for those investors like myself who think VR is simply the next 3D printing, a valuable technology but one with limited mass appeal, it may not prove the wisest investment.
Is profitable growth around the corner?
One high-flying small cap that's actually producing sales already is Australian supercapacitor designer Cap-XX (LSE: CAPX). The company's share price has risen over 180% over the past year as demand for its supercapacitors has increased across industries - as varied as cars and wearable devices.
In the year to June, revenue of A$4.1m was down on the A$5m posted in the year prior. Management blamed this on the timing of contract signings and said it still believes negotiations for several large deals will be completed successfully by the end of 2017.
Cap-XX is still loss-making with pre-tax losses rising to A$1.6m for the year. That said, management is doing well to trim operating costs by slashing administration expenses while maintaining a high R&D spend. Furthermore, increasing numbers of royalty licensing agreements should lead to rising profits in the coming quarters. Investing in loss-making small-caps isn't my cup of tea but I'll follow Cap-XX closely as it does appear to have solid growth prospects from targeting the fast-growing Internet of Things market.
If you also share my reticence to invest in loss-making small-caps, I recommend checking out the Motley Fool's Top Small Cap of 2017. This company has increased earnings per share by double-digits four years in a row and with its shares priced at just eight times earnings it's not too pricey either.
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Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.