Augmented reality and virtual reality are interesting trends for investors in that they’re somewhat difficult to play. Finding VR stocks isn’t an easy thing.
For instance, Sony Corp (ADR) (NYSE:SNE) would seem to be a popular pick. Indeed, Bret Kenwell highlighted SNE as a buy based on virtual reality in January. But while I understand Kenwell’s point, there’s a big problem even beyond the fact that sales of Sony’s PlayStation VR have disappointed by the company’s own admission.
Sony is a massive conglomerate, the PlayStation only is a small contributor to profits. Even assuming long-term success in VR and/or AR for the PlayStation, investors still are taking on the hardware division and a Japanese insurer, among other businesses, while also dealing with currency risk.
There simply aren’t many, if any, pure-play VR stocks. And combined with the fact that market adoption seems likely to be much slower than many realize, investors hoping for some sort of windfall from augmented reality and virtual reality are likely to be disappointed.
The Adoption Problem
As cool as virtual reality is, the fact is that consumers haven’t exactly lined up to jump in, as seen in the performance of Sony’s PSVR. High-end gaming continues to be torrid, driving Nvidia Corporation (NASDAQ:NVDA) shares to near an all-time high. But that trend, along with eGaming, continues to be mostly confined to standard ‘2D’ gaming.
Even key executives in the industry gaming have been skeptical. Take-Two Interactive Software, Inc (NASDAQ:TTWO) CEO Strauss Zelnick said on a conference call last year that he remained skeptical towards virtual reality. Citing the success of Nintendo Ltd/ADR (OTCMKTS:NTDOY) product Pokemon Go, Zelnick argued that AR had much more in the way of near-term appeal.
A week earlier, Electronic Arts Inc. (NASDAQ:EA) head Andrew Wilson said about the same thing, saying it would take years for mass market VR acceptance. And while companies like Samsung, Facebook, Inc. (NASDAQ:FB), and Alphabet Inc (NASDAQ:GOOGL,GOOG) all have released products for the space, all have been little more than curiosities and/or pilot projects.
There likely will be a niche for VR long-term. But as is so often the case with new technologies, predictions of market adoption seem overly optimistic at the moment. And that’s not even the biggest problem with playing the VR trend.
Finding VR Stocks
Even assuming virtual reality does gain real traction, finding a way to invest in it in the public markets is no easy task. Facebook and Alphabet are worth $540 billion and $740 billion, respectively. Even assuming a substantial win in VR (or AR), there’s little chance of the opportunity making a notable dent in those companies’ valuations.
Sony is out. In the past, I’ve recommended both Electronic Arts and Take-Two as video gaming stocks to buy, but the case for those stocks and rival Activision Blizzard, Inc. (NASDAQ:ATVI) is based on digital downloads and in-game content, particularly with their own CEOs suggesting caution on VR.
Any adoption of virtual reality would, to at least some degree, reduce sales of legacy versions of their games.
On the chip side, Nvidia has an opportunity but it’s worth over $100 billion, and data center and automotive look like the big themes there. Qualcomm, Inc. (NASDAQ:QCOM) has potential. It released a new VR platform this week. But I’m still skeptical about that company’s prospects elsewhere, particularly amid its battle with Apple Inc. (NASDAQ:AAPL).
Elsewhere, the prospects look rather grim. Ambarella Inc (NASDAQ:AMBA) and Synaptics, Incorporated (NASDAQ:SYNA) could be VR plays at some point. But both businesses are facing significant challenges with their legacy products, and both stocks look cheap for good reason. Small-cap Vuzix Corp (NASDAQ:VUZI) hasn’t lived up to its potential yet.
There simply isn’t an attractive VR pure play out there. And if the biggest companies wind up winning in VR, in particular, it’s unlikely to make a huge dent in their valuations or to be a significant pillar of the bull cases for their stocks.
As a general rule, I’m somewhat wary of chasing tech trends to begin with. The dot-com bubble, after all, didn’t pop because the internet disappointed. It popped because investors expected too much, too fast, and they paid too much based on those hopes.
For virtual reality, it’s a bit of a different situation. There isn’t nearly as much hype, and there also isn’t as much opportunity. Big winners from virtual reality and augmented reality may be out there. The problem for most of us is that those companies are still private. Until that changes, VR really can’t be a major factor for investors in the public markets.
As of this writing, Vince Martin has no positions in any securities mentioned.