Not Cloud, This Could Be A Big Catalyst For Microsoft Corporation (MSFT)

Microsoft Corporation can scale new highs if it's latest initiatives pay off in the booming AR/VR market.

  • Microsoft's accelerating cloud business is seen as its major catalyst by many.
  • The Augmented and Virtual Reality (AR & VR) market size is slated to reach $162B  in 2020.
  • Microsoft's gaming division with its latest initiatives in the AR/VR space could be a big catalyst in future.

Of late, shares of Microsoft (NASDAQ:MSFT) have been making new highs, with solid double-digit returns YTD, in contrast with its past years. Microsoft's cloud business, along with Office 365 and LinkedIn synergies are seen as major growth drivers. However, Microsoft which is currently no 2 in the gaming console market, could make the AR/VR market its next big growth catalyst. According to IDC, the total revenue opportunity in the virtual reality (VR) and augmented reality (AR) markets will reach $162 B by 2020, from $5.2 B in 2016 globally. Let's take a closer look to see how big the AR/VR opportunity is for Microsoft.

Virtual Gaming Soon To Be A Multibillion-Dollar Opportunity

With the ecosystem expanding vastly, the times are certainly changing for the traditional console video games business. In the booming multibillion-Dollar AR/VR industry, the virtual reality market could be worth about $30B  according to Digi-Capital. To be more specific, the virtual reality video gaming hardware market is expected to be worth $5 billion in 2016, up significantly from $660 million in 2015. This growth is primarily expected to come from two categories, light mobile virtual reality devices, and PC virtual reality devices. According to Superdata, growth would be driven by increased device shipments, primarily by an estimated 27.1 million shipments of light mobile virtual reality devices. However, just 6.6 million PC virtual reality headsets are expected to ship, with Sony’s PlayStation VR selling 1.9 million units.

Compared to the mobile devices market, the PC VR devices market seems small, but 6.6 million is still a big number given that Microsoft's main rival Sony, is expected to sell just about 2M devices. There is huge potential in the VR gaming market with 74% of U.S. respondents under 18 years of age indicating that they were “very interested” in virtual reality according to Llamas. Microsoft's gaming revenue declined by 5% in its last quarter, but it is making all the right moves to turn this around.

Also Read: MSFT Stock: Is This Microsoft Corporation's (MSFT) Next Big Play?

Initially, Microsoft was reluctant to jump onto the AR/VR bandwagon, but they eventually came up with the big announcement of $299 virtual reality headsets for Windows 10 from HP, Lenovo, Dell, Asus, and Acer. Microsoft promises that these headsets, due next year, will "work with affordable laptops and PCs." Microsoft will still likely partner with Oculus, as Microsoft and Oculus are set to offer VR streaming from Windows, Xbox One.

Also, Microsoft announced Project Evo, a collaboration with Intel aimed at developing the next generation of PCs, focused on mixed reality, gaming, AI and security. Gaming looks set to be a key part of Evo with the integration of Beam (its game streaming platform), with its functionalities of game broadcasting and spatial audio to be built in. Microsoft is taking on Amazon's (NASDAQ:AMZN) Twitch, and will include the streaming service Beam in its spring Windows 10 Creators Update for both PC and Xbox One and also with its Project Evo.

Though Microsoft's biggest bet is its Xbox Project Scorpio announced at E3 video game trade show in June. Expected to ship in 2017, it is said to be ‘the only console’ that can do ‘true 4K’ and ‘hi-fidelity VR’. Many VR analysts believe Microsoft's VR initiatives could be a game changer and speculate that the company will look to make Scorpio an even more enticing proposition for gamers by bundling in VR. They think this can be Microsoft's silver bullet for both VR, and the console market. Microsoft has also confirmed that Project Scorpio will be backwards-compatible with games on both Xbox 360 and Xbox One, allowing gamers to keep their current libraries intact. This will put it in a more favorable position to make the life of market leader Sony very difficult.

The AR Move

According to Digi-Capital, the augmented reality market will account for about $90 billion in revenue by 2020. Microsoft's AR HoloLens can be a big part of its AR strategy to avoid being left behind in this space. Microsoft has submitted HoloLens for governmental approval in China and added the manufacturer '3Glasses' to its list of headset developers that already includes Acer, ASUS, Dell, HP and Lenovo. Microsoft's HoloLens ‘mixed reality’ headset has already been launched in Europe, Australia, New Zealand. In the U.K. the HoloLens costs £2,719, while in the U.S., it's priced at $3,000. (See Also: MSFT Stock: Should You Buy Microsoft Corporation (MSFT) Stock Going Into 2017?)

The HoloLens is not a device aimed at retail consumers as of now, but it targets enterprises. NASA, elevator maker ThyssenKrupp and Airbus, are among the customers using HoloLens in their businesses. It is the most futuristic AR headset with no real competitor at present. Nearly all tech giants like Google and Apple are bullish on AR technology. With such huge revenue potential from its HoloLens, Microsoft is ahead of the pack now in the AR space. However, it remains to be seen whether Microsoft can eventually bring augmented reality products to the masses. Consumer-level AR is set to arrive soon. With HoloLens, we can expect a radical shift in how one interacts with computers in near future. This may also breathe new life into Microsoft's declining PC segment.

Putting It All Together

The prospects of the VR gaming market and AR are robust and huge. Microsoft is geared to make the most of the opportunities, with its AR/VR products and initiatives. Of late, Microsoft does not disclose a detailed break-up of gaming revenues. However, even if it captures a moderate share of the VR gaming market with its no 2 position in the console market, it can generate revenues in billions here alone. One shouldn't be surprised if Microsoft opens up another big market for itself in the form of AR and mixed reality, armed with its early mover advantage (HoloLens) . With already existing growth drivers like 'cloud', coupled with unlikely new catalysts like AR/VR, Microsoft could be a solid long-term investment.

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Sreekanth Anasa Sreekanth Anasa   on Amigobulls :

Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice.

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