Facebook Inc (NASDAQ:FB) made a string of announcements at its Oculus’ Connect 4 VR conference yesterday. Can Virtual Reality (VR) be the new growth driver for FB stock?
Shares of Mark Zuckerberg led Facebook Inc (NASDAQ:FB) have lost some momentum and have hardly gone anywhere since the second quarter earnings. Despite that, we are still bullish on FB stock, which also happens to be our one of our top stock picks from the technology sector, which have outperformed the NASDAQ by over 160%. Facebook stock has many growth drivers to be bullish about but Mark Zuckerberg is also making a big push on Virtual Reality (VR). The Menlo Park, California-based company made numerous announcements at its Oculus’ Connect 4 VR conference yesterday. There is a lot of hype around VR and the company's multi-billion investments, but the question remains whether Facebook CEO, Mark Zuckerberg's VR push payoff? Can VR be the new growth driver for FB stock? Let's take a closer look.
Facebook at Oculus’ Connect 4 VR conference.
The social media giant made a string of VR announcements yesterday, right from an affordable $199 Oculus Go tethered headset to a host of Facebook VR features such as Venues, 3D posts, spaces Masks, Toys. There was also a launch of Oculus for business venture. German car maker Audi was announced as the first partner for this. It would be using the $900 rift bundles to build a VR car showroom. This move is seen as a similar move to that of Apple (NASDAQ:AAPL) pitching iPads for businesses which have contributed to iPad sales growth and a similar thing is being expected by Facebook for its rift bundles. Facebook's $2 billion Oculus investment is still a long way of from contributing to Facebook's growth. However, Mark Zuckerberg is very bullish on VR. At the conference, Zuckerberg declared his company’s ambitious goal for VR growth: "We’re setting a goal: we want to get a billion people in virtual reality." But, given that VR hype is yet to live up to its potential, is Facebook's VR push worth it?
Is the VR push worth it?
Facebook's Oculus for business is a good move to start with to boost revenues, but it needs to be seen whether it can deliver Apple-like success. When it comes to VR hardware business, the social networking giant is again taking a Cupertino-like approach, controlling the end-to-end experience. Facebook VR headset future is wireless, uniform and all about their platform. The high-end 'Santa Cruz' will come with an onboard compute reducing dependency on OS platforms. However, with all the advantages of Facebook's VR hardware approach of no tie-up with Windows/Android and the OEMs, this still could be a big gamble which Mark Zuckerberg is taking. Ask why? A Digi-Capital study shows that Mobile Augmented Reality (AR) and not VR will dominate AR/VR for the foreseeable future.
The study further suggests that "VR’s market potential has been diminished by the emergence of mobile AR as a rival platform; premium VR might not accelerate until second-generation standalone premium VR headsets" become a mass market. This is the segment where Facebook is betting heavily with its high-end 'Santa Cruz' headset. The study's findings propose a significant upgrade for AR and a material downgrade for VR. Even an IDC forecast suggests though VR headsets will account for more than 90% of the market until 2019, in the next two years, AR headsets are set to grow exponentially. Jitesh Ubrani senior research analyst for IDC Mobile Device Trackers stated: "AR headsets are also on track to account for over $30 billion in revenue by 2021, almost twice that of VR, as most of the AR headsets will carry much higher average selling prices with earlier adopters being the commercial segment. "
Facebook should also step up its AR efforts.
The emergence of Apple's ARKit and Alphabet (NASDAQ:GOOGL) subsidiary Google's ARCore have taken the Mobile AR market to a new level. Much before these two tech behemoth's Facebooks had released its AR toolkit called Camera Effects platform. However, another Digi-Capital study suggests ARKit is likely to make more money than ARCore and Camera Effects. ARKit and ARCore have an edge over Facebook owing to their strong iOS and Android install base. Despite all this, the Digi-Capital research report states that "From a lower base in 2018, Camera Effects could emerge as the largest single mobile AR advertising platform globally by 2021." The ad spends on AR is growing exponentially and is expected to reach nearly $13 billion this year according to Statista. This number is forecasted to continue growing exponentially and is set to form a major part of AR expenditure in the next 5 years. Given, Camera Effects potential as a leading mobile AR advertising platform, Facebook needs step up its AR efforts to make the most of it.
The rapid growth of Mobile AR is a minor setback for Facebook's VR ambitions. Mark Zuckerberg previously stated that VR plays a big part in Facebook’s overall mission to help people share and express themselves but "VR is going to need 10 years to become a very mainstream big thing." And, 10 years is a long period, things can change quickly, the popularity of Mobile VR may make it little more difficult for VR to become mainstream quicker. However, there is a bigger risk for Facebook's VR hardware approach than the competition from its peers like Samsung or Microsoft or Sony. As this TechCrunch author makes an interesting observation that for Facebook's VR ambitions, 'their main competitor is irrelevancy.' Facebook's Oculus investment is more than three years old but the ride has not been smooth so far and the results not yet significant. Facebook's VR push at present look's like a high-risk move with more uncertainty attached to it than before. Having said all this, Facebook has many other growth drivers which still make FB stock a great long-term buy.
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