When Facebook Inc (NASDAQ:FB) purchased virtual reality headset maker Oculus VR for $2.0 billion back in 2014, many investors were left scratching their heads. Investors asked, “Why would a social network company want anything to do with virtual reality, and even more important, what would it do for FB stock?” Two years later, Facebook’s acquisition is starting to make a lot more sense, and it could prove to be big for FB stock.
Facebook’s “Oculus Rift” virtual reality (VR) headset shipped its first units last week and reviews have been mostly positive. Reviewers have noted that the headset is incredibly immersive and comfortable to wear, and that the device already sports an impressive catalog of games and apps that is sure to keep gamers up all night.
That bodes well for the social media giant, which expects to ship up to 600,000 Oculus Rift units by the end of the year, generating about $400 million in revenue, according to Cantor Fitzgerald analyst Youssef Squali. (Source: “Facebook Will Turn Oculus Rift’s Revenue Potential Into Reality, Analysts Say,” TheStreet.com, March 31, 2016.) That may not sound like much right now, but the Rift could be huge over the next few years, as user adoption accelerates.
How huge will the Rift be for Facebook? Squali believes that revenue for the VR headset will quadruple next year to $1.6 billion and that by 2020, Facebook will sell about 11 million units, reaching revenue of almost $7.0 billion. (Source: “‘Facebook Could Make $7B in Virtual Reality Revenue in 2020,’ Says Cantor,” Barron’s, March 31, 2016.)
If Squali’s forecast holds up, that means that by 2020, Oculus Rift revenue will account for about 10% of Facebook’s total revenue.
“Facebook is positioning itself at what we believe is the epicenter of a multi-year, multi-billion dollar growth opportunity in virtual reality,” Squali wrote. “While the adoption rate could be slow initially, with the platform attracting gamers at first, we estimate that virtual reality could account for ~10% of FB’s overall revenues by 2020, and help sustain outsized revenue growth for the company for several years.” (Source: “Oculus could make up about 10 percent of Facebook’s revenue in four years,” Business Insider, March 31, 2016.)
This could be a huge deal for Facebook, as it would open up its revenue stream to another category other than the revenue it collects from ad sales across its various platforms.
Suddenly, Facebook’s $2.0-billion purchase of Oculus may seem like a bargain. Estimates are all over the place, but one thing is for sure: the virtual reality market is about to take off.
Market research firm TrendForce predicts that the market for VR hardware and software will reach $70.0 billion by 2020. (Source: “Virtual Reality Could Generate $70 Billion in Real Money by 2020,” Re/code, December 3, 2015.)
And another recent report forecasts the number of virtual reality devices sold will reach 2.5 million in 2016, 12.0 million in 2017, and 24.0 million in 2018. The same report says that by 2018, virtual reality devices will become a $4.0-billion market. (Source: “Augmented and Virtual Reality Devices to Become a $4 Billion-Plus Business in Three Years,” CCS Insight, last accessed March 21, 2016.)
Given the expectations for the virtual reality market over the next few years, it’s not surprising that Facebook is making a big push into VR.
But it’s not just gaming that CEO Mark Zuckerberg has his eyes set on, as he wants to use the headset as a platform for many other experiences. In fact, Zuckerberg believes that virtual reality will eventually become the most used communication device.
“Imagine enjoying a court side seat at a game, studying in a classroom of students and teachers all over the world or consulting with a doctor face-to-face—just by putting on goggles in your home,” Zuckerberg said. (Source: “Mark Zuckerberg,” Facebook Inc, March 25, 2014.)
The company recently announced that it formed a “Social VR” team to build technology that will enable people to engage with Facebook’s network and have social experiences in virtual reality. The team will work on the Oculus devices, while also trying to anticipate future platforms.
The Bottom Line on Facebook Stock
For now, Facebook’s main focus is on gaming and so far, the company is ahead of its rivals, including Samsung Electronics Co Ltd, Sony Corp (ADR), and Microsoft Corporation, which have all released or are about to release virtual reality devices.
According to the Game Developers Conference’s 2016 State of the Industry Survey, 19% of game developers polled said they are developing games specifically for the Oculus Rift, which is the highest number devoted to a single platform. (Source: “Facebook’s Oculus Rift Is Tops With VR Game Developers As Virtual Reality Gets Real In 2016,” International Business Times, January 20, 2016.)
If forecasts ring true, Facebook’s Oculus Rift has the potential to be huge for the company, and that will mean only good things for FB stock.