Facebook (NASDAQ:FB) finally rolled out its Oculus Rift that's priced at $599, which is much higher than most consensus estimates of around $350-500. The mismatch between pricing and expectation is a shrewd marketing strategy despite the initial sticker shock and will likely attract demand, as early adopters may still purchase the device despite the price. To my knowledge, some early adopters are expected to see their Oculus device shipped in June the earliest, suggesting demand is indeed strong.
Bottom line, although I am bullish on FB's VR outlook, I do not expect VR to have a material impact on the company's earnings in 2016 (see "Facebook: 2016 Outlook - Messenger And Virtual Reality"). However, I do expect the Oculus and the upcoming Oculus VR+PC bundle to significantly draw the attention of mass market early adopters, giving them an initial look at the power of VR across multiple applications, including gaming, entertainment (casual and adult), media, productivity, real estate, education and so forth. This, along with Sony (NYSE:SNE), HTC, Microsoft (NASDAQ:MSFT) and Chinese white-label VR brands, will lay the foundation for a potential acceleration of VR adoption in 2017 and beyond. I remain bullish on FB not only because of its unrivaled position in social networking and strong network effect, but the company also has multiple medium-term drivers, which give comfort to the investment community with respect to its growth prospects. I remain bullish on the stock, and the current valuation of 35x 2016E earnings is attractive relative to its growth profile.
Looking at the Oculus specifications, near-term adoption could be a challenge given the requirement. In other words, most of the potential buyers of the Oculus may need a PC upgrade to meet its spec requirements.
- Video Card Nvidia GTX 970/AMD R9 290 equivalent or greater
- CPU Intel i5-4590 equivalent or greater
- Memory 8GB+ RAM
- Video Output Compatible HDMI 1.3 video output
- USB Ports 3x USB 3.0 ports plus 1x USB 2.0 port
- OS Windows 7 SP1 64-bit or newer
The $599 price tag is beyond the high-end of expectations ($350-500), but it is worth noting that early demand for the Oculus is strong, with some shipments being pushed back to as late as June. Nonetheless, investors can still expect to see roughly 1m or more early adopters for the device, given that the pre-order was made available to over 20 countries. Given that FB has already managed the consumer price expectation with the headset, I think a potential catalyst for adoption could be the Oculus-ready PC, which may be priced at roughly $1,500 as the company indicated. If the price is consistent with what the company previously hinted and the current consumer expectation, then we could see an accelerated adoption of Oculus-ready PC when it comes out next month.
The strength in Oculus could have other implications in the semiconductor world. Most notably, AMD and Nvidia (NASDAQ:NVDA) are expected to launch the next-generation high-end graphics cards catered to VR. This could potentially drive down the price of the VR headset later this year and early next year, consistent with my view of an expected ramp on early adoption.
Net-net, despite the sticker shock I believe Oculus had a solid opening week. Expect greater clarity during FB's upcoming quarterly call and the release of an Oculus-ready PC next month.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.