Virtual Reality: The Safest “Next Big Thing” In Investing

If you have been investing for very long or even if you have just been studying the investment markets, you have probably heard one or two “next big thing” stories. Whether it was back in the 90s and the internet age, the silver market in 2011 or solar energy in more recent years. There always seems to be at least one or two of these ideas going on at any given time. At present, the medical marijuana story is a big one and crypto currencies is another one. But of the ones going on right now, the one that seems to be the safest is the virtual reality industry.

The virtual reality industry is beginning to scratch the surface of its potential uses. Initial developments were mostly focused on entertainment and gaming usage, but we are starting to see progress in other areas. Think about how it could be used for selling things like cars or homes. Potential buyers could place themselves in the driver’s seat of the newest model from Mercedes or Lexus or place themselves in the master bedroom of a house in California even if they are in New York. While it might not take the place of a real test drive or a real walkthrough of a home, it could be another tool for auto manufacturers or real estate agents.

While the industry isn’t in its infancy stage anymore, virtual reality has a lot of growth ahead and growth forecast for the industry range from $22 billion to $160 billion by the year 2020. While that is a wide range, the current hardware revenue for 2017 is estimated at $2.3 billion. So even the low-end estimate would mean a ten-fold increase in the next three years.

There are several ways to take advantage of this potential growth, but it can be broken down into three tiers of investments. There are big household names that are making significant investments in the industry, there are tech companies that are well established and not just focused on virtual reality, and then there are the low-cap companies that are focused almost exclusively on the industry.

 

First Tier- More Conservative Approach, Household Names

While virtual reality is the focus of these businesses, they are making a significant investment in the industry and should reap the rewards of the growth. These are household names with other, more established business lines.

 

Facebook (Nasdaq: FB) – Facebook jumped into the virtual reality pool headfirst in March 2014 when it purchased Oculus for $2 billion. Oculus was well-known in the gaming industry and its headsets are considered to be among the best in the industry. Facebook is flush with cash and could make additional investments in the virtual reality realm.

 

Alphabet (Nasdaq: GOOGL) – the company formerly known as Google also made a significant investment in virtual reality when it purchased Magic Leap for $542 million in 2014. The company has already made an imprint with its $2 Google Cardboard viewer that allows users to experience virtual reality through apps on the Google App store. The company also has Google Glass which is a viewer shaped like a pair of glasses.

Microsoft (Nasdaq: MSFT) – the initial thought of Microsoft being part of the virtual reality industry is probably with regard to software, but that isn’t necessarily the case. In 2016, MSFT introduced a headset that is a blend of virtual reality and augmented reality. The Microsoft Hololens is a self-contained holographic PC.

 

Second Tier- Well Established Tech Firms with Significant Interest in VR

 

Advanced Micro Devices (Nasdaq: AMD) – AMD is well established in the semiconductor industry and their System on Chip (SoC) and VR ready GPUs have them positioned to benefit from the expected growth in the virtual reality industry. Sales of the company’s low end GPUs will benefit greatly as headset sales increase while the SoC sales benefit as console sales from Xbox One and PlayStation4 increase.

 

NVIDIA Corp. (Nasdaq: NVDA) – NVIDIA designs graphic processing units (GPU) and graphics cards. The company’s products are among the best in the industry and it is so vested in VR that they hosted their own GPU technology conference and chose to put their plans and capabilities on display. The company is even working with NASA on a Mars VR experience.

 

Sony Corp. (NYSE: SNE) – You may be surprised to see Sony in this tier, but even though they are a household name, there have been several failed launches that have caused the company’s image to be tarnished. However, many believe that the PlayStation VR could be the sole product that turns things around for the company. The console is a low-cost leader in the industry with a price tag that is hundreds of dollars less than Oculus and HTC’s products.

Third Tier- Smaller Companies with a Primary Focus on Virtual Reality

 

Autodesk, Inc. (Nasdaq: ADSK) – Autodesk software programs such as Autodesk Maya and Fusion 360 are compatible with Microsoft’s Hololens technology. As the growth in Hololens sales increase so too should the VR programs offered by ADSK. The company also has the Spark 3D printing platform which will be compatible Windows 10.

 

GoPro, Inc. (Nasdaq: GPRO) – The camera manufacturer has been offering their small, attachable cameras for several years with a focus on personal use, but the company is shifting its priorities to professional uses. The Google Odyssey VR uses 16 different cameras simultaneously to capture spherical video. This allows the device to capture 360-degree videos and it is compatible with the open-source VR platform from Alphabet, Jump.

Himax Technologies Inc. (Nasdaq: HIMX) – Himax Technologies was founded in 2001 and is based in Taiwan. The company provides display imaging processing technologies for consumer electronics. The company’s integrated circuits are used by customers such as Facebook, Lenovo and Microsoft. As the virtual reality market grows, HIMX stands to benefit greatly.

 

 

The Technical Picture Versus the Fundamental Picture

You can see that many of the stocks have a 10-week RSI that is at or near overbought territory. With the way the overall market has been moving higher, this isn’t a great surprise. In order to help break down the stocks, we used two measures offered by Investor’s Business Daily to create a table showing how the stocks have done from a fundamental perspective. The EPS ranking gages how the company’s earnings have grown in recent years with rankings ranging from one to 99 with a higher number representing superior earnings growth. The SMR rating measures the company’s sales growth, profit margin and return on equity and then assigns a grade of A thru E. An A rating is the best and an E rating is the worst. Given that information, the following table shows how the three tiers break down.

 

With this table, investors can get a quick snapshot of how the three tiers breakdown and how the third tier stocks represent a higher-risk investment scenario. Depending upon one’s own risk tolerance levels, you could use the table to pick and choose which companies to invest in if you don’t want to invest in all nine of them. You could also possibly invest in one stock from each tier in order to mitigate risk.

Obviously, each company’s success will vary and the growth in the VR industry will have a different impact on the bottom line of each company. The third tier stocks have a greater dependency on VR growing at or near estimates while the first tier stocks have other business lines that account for their overall success. All nine stand to benefit as virtual reality grows and investors can reap the rewards.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.

One comment

  1. This is an amazing technology, but the question is whether it will be supplanted by something else.

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