Facebook (NASDAQ:FB) has recently apportioned $2 billion to acquire Oculus VR Inc. and analysts are trying to determine whether the acquisition was worth it. Therefore, I am writing this article to explore the opportunities this acquisition can bring to Facebook as I believe in the far-sightedness of the company's management.
What's the Deal and Why?
Facebook recently announced the deal with Oculus VR, the creator of a virtual reality headset, involves total considerations worth $2 billion. This valuation amount is comprised of a $400 million cash payment and 23.1 million shares of Facebook common stock at an aggregate value of $1.6 billion. The deal also provides for an additional consideration of $300 million earn-out in cash and stock contingent upon the achievement of certain milestones. The transaction is anticipated to close during Q2 FY 2014.
Oculus has yet to deliver a unit of its virtual reality headset, the Oculus Rift, so the unconfirmed revenue brook from Oculus has made many of the company's investors worried. This is because Facebook seems to betting on the future prospects of this technology and funding Oculus with this transaction to speed up Oculus' growth in gaming, communications, and new social experiences.
Mark Zuckerberg, Facebook's founder and CEO, sees the usage of this technology of virtual reality through a broader perspective and regards that as the rationale behind the acquisition. The company's CEO is acquiring prospects beyond the mobile platform that is currently the latest medium to gaming, working, and communication.
Presently, the applications for virtual reality technology are in their emerging stages and confined to gaming while a few industries are experimenting with the technology for further applications. The technology has the potential to replace the mobile platform in operation nowadays and can emerge as the next level of social and communications. Oculus currently dominates the market in immersive virtual reality technology and was able to capture solid interest from developers for this technology. This fact can be proved from the sale of 60,000 units of Oculus VR's first development kit at $300 per unit generating a total of $18 million in revenue. In February 2014, the company was forced to stop production of this version as demand surpassed the company's expectations and some of the components used in the development kit were not being manufactured then.
Facebook has plans to outspread Oculus' existing edge in this technology from gaming to new verticals such as communications, media and entertainment, and education with the aim to change the way we perform these activities.
Now, let us have a look at the available opportunities for the company from the prospects associated with the virtual reality technology.
Virtual Reality Technology and the Opportunities It May Bring
According to a recent market research report, the augmented reality (AR) and virtual reality (VR) market is set to grow at a CAGR of 15.18% from 2013-2018 reaching $1.06 billion in 2018. This growth will come from the technology's ability to fit in an extensive range of emerging applications. It is anticipated that by the year 2015 the augmented reality technology will be widely used in education for eccentric learning and teaching technologies. The key facilitators to the growth of augmented reality technology and virtual reality are innovation, computer technology, and internet connectivity. The application in healthcare industry will also be a reason for an implausible growth in the AR and VR market in addition to the demand for technology in the m-commerce industry.
According to Iribe, co-founder and CEO of Oculus VR, virtual reality will turn out to be an enchanted way to improve social experiences like never before. It will connect people and enable them to interact in such a way that they would feel as if they are really there in front of each other.
Other players in the gaming industry are also working on this technology that also indicates that it is an emerging trend. Sony (NYSE:SNE) is currently promoting its own virtual reality headset and Project Morpheus is geared up to work with PlayStation 4. Moreover, Microsoft (NASDAQ:MSFT) is also in the development phase for a complementary headset to its Xbox One.
Thus Facebook has to think beyond what these players from the gaming industry are doing. Accordingly, the company's management wants to make Oculus a platform for many other experiences ranging from applications in education to healthcare.
As a result, the opportunity for Facebook's top-line growth may not only come from direct sales of the Rift units but there is an opportunity for the company to introduce a whole new approach to revenue generation in the form of licensing fees.
With the virtual experience offered by the Rift units, Facebook could engage universities as clients with students taking advantage of sessions in halls, court rooms, and other auditoriums where it is difficult to organize a large number of viewers.
The U.S. military may also turn out to be another large potential client of this technology through Facebook. This is because the military will find it really helpful to use virtual reality for training purposes as war zones are generally far away from training centers. The University of Southern California's Institute for Creative Technologies has already established projects that would facilitate training in urban war zones or Naval battleships. Although the department has its own VR headset and other hardware, Facebook's recently acquired Oculus Rift could prove a commendable replacement.
Certainly Facebook will concentrate profoundly on the latent for virtual reality within the social network environment. But by allowing the technology's use within other arenas additional revenue will provide safety for the company's top-line while it defines the preeminent use for the Rift in combination with its social network platforms.
However, despite all of the positivity surrounding the usage of VR technology there are still some concerns.
Some Concerns to Address
- Facebook has no console and no PC store (like Steam) to sell the content related to this VR technology. Additionally, Facebook also has no experience of building, distributing, and servicing hardware worldwide. Even if Facebook is the first to distribute this hardware technology, Sony and Microsoft have the means and platforms to sell the software and services for VR hardware should they chose to introduce the technology one day.
- The VR setup seems related to a longer-term. By the time it will actually be available, there may be new products in the market that may be similar in appearance or function to VR headsets. For example GOOG Glass, even though it is not a VR headset seems more appealing as it can be worn outside.
Although the exact use of the Oculus Rift by Facebook is still open for discussion, it is clear that Facebook and Mark Zuckerberg reached this deal to purchase the virtual reality start-up for its prospects and anticipated ability to introduce it to numerous markets. Investors may still be facing difficulty in figuring out the motive behind the acquisition but with the ability to use the CR headset for various uses and manifold revenue streams, Facebook's latest acquisition may be its best yet.
Facebook understands the significance of using idle cash and high stock value to assimilate and take over other technologies to add to and expand its business model. I commend Zuckerberg and his management for making the moves to guard the company's market share not just in a self-protective way but in a keen, growth leaning and visionary approach.
Telsey Advisory Group has recently reiterated its $82 price target on Facebook's stock while the stock is currently trading around $61. This reflects the fact that the current stock price is a bargain and is a good point to enter to gain from the company's far-sighted vision for technology and upcoming growth. Radical investors should look at the prospects the virtual reality technology could manage to pay for in the near future.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by a Gemstone Equity Research research analyst. Gemstone Equity Research is not receiving compensation for it (other than from Seeking Alpha). Gemstone Equity Research has no business relationship with any company whose stock is mentioned in this article.