The entire hardware sector is facing new threats, from tariffs in the US-China trade war to supply chain shortages, after factories closed with the coronavirus outbreak. The pressures are resetting expectations at major companies such as Apple, and may hit even more acutely at private start-ups that rely on outside investors to keep their operations going.

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

(Alibaba is the parent company of South China Morning Post).

Majority of promising AI start-ups are still based in the US

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, is not currently interested in acquiring Magic Leap’s business, the person said.

In addition to Facebook, Microsoft and Amazon.com have all been investing in augmented reality with their own divisions, said Jitendra Waral, a Bloomberg Intelligence senior analyst. AR hardware may be limited to enterprise uses for the next several years, he said.

For Magic Leap, the valuation of the company will be a question mark because suitors may have to take a long-term bet without substantial near-term revenue, Waral said. The scalability of the company’s technology could also be an issue, he added.

“One thing to keep in mind with AR hardware is we do anticipate mainstream adoption being a few years away, so whoever buys them needs to have the financial capacity to carry the products through as AR is still evolving,” he said.

Magic Leap’s deliberations, which may not lead to a transaction, come as the company shifts its focus to selling its products to companies in the health care, industrial and financial sectors after slower-than-expected adoption by consumers.

Representatives for Magic Leap, Facebook and J&J declined to comment.

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 US$100 billion within a few years.

Led by Chief Executive Officer Rony Abovitz, Magic Leap has raised about US$2.6 billion from investors and is valued at US$6 billion to US$8 billion, making it one of the most well-funded tech start-ups in the US 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, Saudi Arabia’s sovereign wealth fund PIF, Singapore’s state-owned investment company Temasek Holdings and AT&T.

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 US$2,300 headset in 2018 after years of secretive work and has pledged to deliver technology rivalling television or the telephone in societal impact.

These audacious promises have made Magic Leap the subject of both intense interest and a target for sceptics, who say it has failed to deliver on its early promise and has not met its own sales goals. Attracting a deep-pocketed suitor could buy the company time to roll out future products while allowing investors to cash out.