The virtual reality market is forecast to be in the tens of billions of dollars in the next few years, but early reviews of Facebook Inc‘s (FB) Oculus Rift suggest FB has a lot of work to do before it grabs a share of actual riches.
That’s not to say that Facebook’s investment in VR is a mistake. Far from it, if researchers projections come to fruition. Estimates are all over the place, but even the conservative ones represent a huge revenue opportunity. If it can grab a piece of the pie, FB stock is a stampeding buy.
Market researcher TrendForce says the total value of the virtual reality market — including both hardware and software — will reach $70 billion by 2020, according to Re/Code. Digi-Capital expects the opportunity to hit $30 billion in the next four years, while MarketsandMarkets expects VR to hit “only” $16 billion.
Facebook booked full-year revenue of $18 billion last year, so the implications for FB stock are pretty obvious. Even if FB were to grab, say, just a third of the conservative estimate, that would add about $5 billion in additional revenue, roughly a 25% increase over current levels.
No wonder FB paid $2 billion for Oculus Rift. If it’s a hit, it could supercharge the company’s already impressive sales growth and force the market to pay a lot more for FB stock.
No Tailwind for FB Stock Just Yet
The frustrating part is that it takes time to perfect any new gadget and then scale it up to bring retail prices within reach of a mass market. The Oculus Rift is currently priced at $600. That’s hardly a demand-friendly number — and it’s not ready for prime time, anyway.
Reviews from across the tech media were mixed. Although everybody says Oculus Rift has that “wow” factor, if the criticisms are true, only early adopters will embrace it.
As is always the case with a new platform, the software from developers isn’t really in place yet. Other problems cited by reviewers: it’s clunky, it’s pricey, it requires a high-powered Windows PC, it can cause eye strain, and more.
That’s all fine. No one expected the Oculus Rift to be near-perfect on arrival. If all it needs to do right now is feel like magic, mission accomplished.
But investors in Facebook stock will have to wait a while before the platform matures into a material revenue generator … and there’s always the risk that it doesn’t get there.
Uncertainty accounts for a ton when it comes to pricing securities. Yes, FB stock will deserve a higher earnings multiple if VR is a success.
For now, however, it’s simply too soon to bake this new platform into Facebook stock.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
