Virtual reality has been around for decades, but we’re finally nearing a point where the technology is ready to take off.
Facebook Inc (NASDAQ:FB) has made most of the headlines thanks to its Oculus VR buy and Samsung’s (OTCMKTS:SSNLF) Gear VR is well-known at this point. In fact, Facebook CEO Mark Zuckerberg said it best: “VR has the potential to change the way that we live, work and communicate.”
That’s the kind of thing that is going to make many, many millionaires.
Right now, most people think of virtual reality in terms of gaming and entertainment, which is fair, because that’s where the technology is right now. But over the long run, expect VR to expand into categories such as healthcare, education and travel.
That’s why IDC forecasts the VR market to hit $162 billion by 2020, up from only $5.2 billion in 2016. This represents a sizzling 181% compound annual growth rate.
A number of tech stocks will play in virtual reality, but these are the three best tech stocks to buy if you want to lock in long-term VR profits.
Virtual Reality Tech Stocks to Buy: Advanced Micro Devices (AMD)
For many years, Advanced Micro Devices, Inc. (NASDAQ:AMD) likely wouldn’t have made most people’s lists of stocks to buy.
For any reason, virtual reality or not.
However, AMD has suddenly become a renewed company, shooting up 140% year-to-date. A key to its continued resurgence will be its heavy investments in virtual reality.
AMD has plenty of experience with building sophisticated graphics chips, but the company also has been savvy about its business strategy in transitioning toward VR. It keeps a low-cost approach, which gives it the chance to establish an industry standard. Consider that consumers believe VR systems are overpriced, according to an Advanced Imaging Society survey. AMD doesn’t contribute to that; its latest chips are priced at below $200.
AMD already has major customers including Facebook and HTC, but Sony Corp (ADR) (NYSE:SNE) might be the most critical. This week, the company will launch the PlayStation VR system, which will cost about $499 (compared to $599 for the Rift and $799 for HTC’s Vive). Then realize the PlayStation install base is expected to hit about 53 million by the end of 2016, according to analysts at HIS.
Advanced Micro Devices also looks attractive thanks to improving fundamentals. AMD has shored up its balance sheet via things such as a recent $1 billion equity raise. It has reached profitability, and the top line is going again.
Plus, AMD has the potential to expand into other markets, such as the data center. Next year, the company plans to launch new chips for this market, which is currently dominated by Intel Corporation (NASDAQ:INTC).
Bundle this all up, and give it a nice price-to-sales multiple of 1.5X — better than similar tech stocks like Broadcom Ltd (NASDAQ:AVGO) and Texas Instruments Incorporated (NASDAQ:TXN) that sport multiples at over 5X — and AMD stock looks awfully attractive.
Virtual Reality Tech Stocks to Buy: Qualcomm (QCOM)
While Qualcomm, Inc. (NASDAQ:QCOM) does not build its own devices, it does create reference models that showcase what the company’s core technologies can do. The strategy has been very effective in getting other companies to adopt QCOM chipsets. It helps that hardware manufacturers should have no fear that Qualcomm will come out and compete with them in the space.
Well, QCOM is taking the same tact with its VR systems.
Just look at the VR820, which has two 4K displays, two cameras, 3D sound, four microphones and eye-tracking. And unlike an Oculus, there is no need to connect this to a smartphone or PC.
VR likely will remain a small part of Qualcomm’s business, but the market’s sheer size should still be able to provide significant lift for QCOM over the long haul. There also should be nice leverage from QCOM’s existing global customer base of device manufacturers, many of whom will be looking at the VR opportunity.
Meanwhile, QCOM continues to benefit from its core business, which is a big-time money maker. Qualcomm managed to squeeze out $1.4 billion in profits on revenues of $6 billion. There’s also buzz that QCOM will rev up its M&A activity, perhaps with the purchase of NXP Semiconductors NV (NASDAQ:NXPI). The deal would allow Qualcomm to benefit from growth markets such as automotive tech, the Internet of Things and mobile payments.
Qualcomm’s 3% dividend yield ain’t half bad, either.
Virtual Reality Tech Stocks to Buy: Universal Display Corporation (OLED)
Universal Display Corporation (NASDAQ:OLED) has been around for more than 20 years, but right now seems to point to perhaps the company’s best position for future growth.
Universal Display is a pioneer in organic light-emitting diode (OLED) technologies, which is for digital displays like TVs, PC monitors and smartphones. But the OLED technology also has many applications for virtual reality, as it allows for flexible screens that are semitransparent and provide for rich swaths of colors.
In addition, OLED has an enormous portfolio of patents (more than 4,200). Given the importance of VR as well as the transition to flexible screens with next-generation smartphones, the intellectual property should be quite valuable.
OLED stock has had its issues. Shares have lost about a third of their value since August, largely due to manufacturing problems, as well as Samsung’s production halt on the Galaxy Note 7 — which uses OLED systems.
Just consider this a nice entry point for OLED, which will be a supplier for Apple Inc.’s (NASDAQ:AAPL) next lineup of iPhones in 2017.
Tom Taulli runs the InvestorPlace blog IPO Playbook and also OptionExercise.com, which provides interactive tools and financial services for those who have employee stock options (pre- and post-IPO).Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.