Facebook Inc (NASDAQ:FB) is yet to see returns from its massive investment in Oculus, but that could change soon. Here's Why.
Shares of Mark Zuckerberg-led Facebook Inc (NASDAQ:FB) have closed in the green for the last 5 consecutive trading sessions, gaining by more than 7% over this period. FB stock is at a new all-time high. Facebook fundamentals remain very strong, driven by catalysts like Instagram and emerging opportunities for WhatsApp. We've been bullish on Facebook stock for a while now and the stock hasn't disappointed, delivering an incredible 38.43% YTD returns. While most of Facebook's investments have paid off, its $2 billion investment in Oculus is yet to fructify. But, that could change soon if recent rumors about its new Virtual Reality (VR) product turn out to be true. Here's why.
Oculus' $200 VR headset could be a defining moment in VR space.
Recently, Bloomberg reported that Facebook is planning to release a $200 wireless Oculus headset next year. This news comes after the social media giant recently announced that the price of the Oculus Rift will be reduced for the second time this year. Oculus Rift is set to cost $399 for a limited period of time. This move is aimed at attracting new customers amid concerns about VR industry's prospects. VR had even taken a back seat at this year's biggest gaming show E3, after being under the spotlight in last years edition. Facebook-owned Oculus even gave E3 2017 a miss.
The lack of VR focus by major players at E3 2017 could suggest that the VR hype is not living up to the initial buzz. In spite of a meek response to VR so far, some research firms are extremely optimistic about the long-term prospects of VR. International Data Corporation (IDC) expects the AR/VR market to reach $143.3B by 2020 and predicts VR headset sales to grow at a very strong pace, with a CAGR of 48.7% through 2021. A PWC study finds that China’s demand for VR headsets will reach 85.9 million by 2021, overtaking the United States' demand for 68 million units. Given such optimistic projections, where do the prospects of Oculus stand?
Things have gone bad recently for Facebook's billion dollar VR investment. According to Statista, Oculus held over 1/3rd of market share in 2015, leading all VR headset manufacturers. However, a June 2017 report by the IDC shows that it has fallen way behind its competitors. Facebook’s Oculus Rift headset was at the bottom of the headset sales list by top producers, with only 100,000 units shipped in Q1 2017. Sony is the present market leader in tethered headsets sales, having sold more than a million headsets since their launch in 2016 end. However, if you look at VR headset market as a whole, Samsung, which makes untethered headsets, is the market leader, having shipped the most number of VR headsets in Q1 2017. However, Oculus' $200 wireless headset could disrupt this space and change Facebook's fortunes drastically.
An important point to note here is that Samsung might be the overall market leader in VR headsets, but the gear VR headset is an untethered VR headset, for which you need a smartphone to create the VR experience. Oculus Rift or Sony PlayStation VR or HTC Vive hook up to either a PC or console. Sony is the market leader in this space. Now, the new Oculus headset, code-named “Pacific", won’t require a PC or smartphone. This could be a game changer. One of the major reasons for the tepid response to tethered VR headsets is the requirement of a high-end gaming PC or console, which is beyond the reach of most people due to the high cost. With a $200 headset, VR could really become mainstream.
Another major factor which works well for this new VR headset is that it is wireless. Microsoft (NASDAQ:MSFT) which recently launched its most powerful gaming console till date, Xbox One X, has chosen to ignore the clamor for a VR option. Phil Spencer, Head of Xbox, said he is “long-term bullish”, and a “believer in the category" but had some reservations about VR headsets in the current form. For VR to go mainstream, Spencer opines that "I do think we need to lose the cords at some point, we’re a few years from that." With this $200 wireless headset, Oculus could set the ball rolling. There are also reports of the company working on a prototype device code-named Santa Cruz which is a wireless Rift, with the full power of the original device sans PC. This could take VR to next level.
Lastly, Oculus has plans to hit the Chinese market with a custom version of the headset which will feature Xiaomi branding and run some Xiaomi software applications. Going by PWC's bullish predictions about Chinese VR market, this could be a great move to mass market the device. Facebook's overall business model continues to deliver strong results. The Oculus investment could come to life if the company manages to get the reported hardware right. It has the key advantage of an active ecosystem of downloadable VR games and apps. Further, the company has a lot of incentives for developers to make VR content for them. It has committed nearly $500 million towards companies developing compelling VR content for their platform. This is very encouraging for the ecosystem to grow at a faster clip. Eventually, Oculus could boost the FB stock price further if it manages to strike success with the $200 headset.
Facebook stock continues to remain a good long-term buy and it also happens to be among our top stock picks from the tech sector, which have outperformed the NASDAQ by over 142%. If you are looking for top stocks from the auto sector, we also have our picks from the auto sector, which have beaten the S&P 500 by a massive 221%. In case you're looking for technical trading ideas, you should check out our daily trading ideas section.