Source: The Guardian
Over the past week Facebook's (NASDAQ:FB) Mark Zuckerberg has announced that the company will be shipping its Oculus Rift virtual reality platform beginning early March. I seek to focus on the hardware component of Oculus Rift and products like it such as Microsoft's (NASDAQ:MSFT) Hololens and Sony's (NYSE:SNE) Morpheus and in particular how these products can function as a long-term growth driver for graphics manufacturers like Nvidia and Advanced Micro Devices (NASDAQ:AMD). Although the argument I hope to make also applies for CPU manufacturers like Intel (NASDAQ:INTC) as well as RAM manufacturers such as Sony, I find this argument most compelling for graphics manufacturers due to the greatest need for graphics upgrades in currently existing systems.
If one takes a look at the Oculus Rift hardware requirements we can see that the platform requires a powerful machine, particularly one that possesses:
- GPU: Nvidia GTX 970/AMD 290 Equivalent or greater
- CPU: Intel i5-4590 equivalent or greater
- RAM: 8GB or greater
We can see that even though most machines possess 8GB of RAM and some machines an Intel i5-4590 or greater, very few machines sport the equivalent of an Nvidia GTX 970. A quick Amazon search reveals that this component is not a particularly cheap component. The average GTX 970 retails for approximately $300-$350.
Typically these graphics processors are only utilized by hardware enthusiasts or PC gamers who want to have the highest graphics settings. However the entrance of virtual reality into the market presents an interesting growth opportunity for discrete graphics makers because these graphics cards will not only be consumed by the gaming/hardware enthusiast community but also anyone who is interested in utilizing a VR platform. The Greenlight VR blog on virtual reality technology sees VR-based hardware and software accelerating at an accelerating pace from 2016 to 2020.
Furthermore, Goldman Sachs argues that VR could potentially expand to an $80 billion market in the long term. They even help us with a breakdown of which parties may be potentially interested in virtual reality technologies.
Lastly, Tractica identifies that the VR market could reach $4.5 billion in the commercial sector by 2020.
The takeaway here is that each VR platform needs dedicated hardware in the form of the graphics processing unit to be utilized at its full potential.
While many of these early adopters may be gamers who already possess very high end graphics and computer processors, entities such as businesses or early adopters outside of the PC video gaming enthusiast realm will most likely not have Oculus-ready devices at their disposal. These individuals would then need to buy the hardware that can support the VR platform of their choice. Although I don't anticipate this trend being particularly significant in the short term, I do see it potentially picking up speed in the medium and long term. Depending on the level of VR adoption and the stickiness of the ecosystem supporting the platform this trend has the potential to accelerate over time. It also may bear mentioning that content creators may have more powerful graphics needs than the average gaming enthusiast which may result in the purchase of more powerful processor.
Furthermore as competition within the VR market heats up with the Microsoft and Sony offerings coming online in the relatively near future, we can expect the price of VR headsets to come down. In that case we also may see that individuals and businesses that would have originally spent all $500 on a VR headset choose to allocate perhaps the $100 they save on a VR headset for a better processor in order to make their VR system future proof. This potential economic shift with regard to competition may not only be good for VR adoption rates but also for processor manufacturers.
Although this opportunity may become a significant tailwind over the next five to ten years this discussion would not be complete without a dialogue about some of the risk factors.
- Specialization Risk
Specialization risk refers to the computer industry's ability to specialize processing power into different tasks making other forms of hardware obsolete for that particular kind of processing. An example of this type of risk may be seen in the discrete graphics market where Nvidia produces not only the GTX line of graphics cards but also the Quadro line of graphics cards dedicated more toward CAD and commercial solutions. There is a risk associated with the VR market interacting with the graphics market the same way where as the GeForce line did with the Quadro line where products that originally were useful for VR applications may be outclassed by more dedicated solutions. Although much of this risk can be mitigated with Nvidia or AMD producing a graphics processor dedicated to VR functions over desktop graphics processing this is tech and the tech industry by nature is relatively unpredictable. I hesitate to say for certain that this market shift will be completely beneficial for the already existing processor manufacturer giants.
- Adoption Risk
It's also important to note that Facebook's Oculus Rift will not be compatible with any Apple or perhaps Linux offering simply because of the hardware requirements. The significance of this risk factor depends upon the stickiness of the ecosystem surrounding virtual reality becoming essential to the point where individuals would be willing to shell out the extra thousands of dollars to forgo their Apple machines in favor of the VR platform. In that regard VR could simply become a niche product that only attracts hardcore gamers or specific businesses. I don't see this particular hurdle being significant over the long term for Facebook's Oculus Rift which already has access to video games such as CPC Game's massively popular EVE Valkyrie and other writers are already dreaming up potential applications in both business and entertainment. The risk here comes from uncertainty with regard to total adoption more so than a lack of data. It's difficult to make a firm judgment one way or another. But in either case, a safer bet on the adoption of VR may be a bet on the hardware components that make it possible to use the VR headset.
I can't predict the future. But as an investor, we have multiple options on how to play the growth of VR technologies. The most obvious lies in investing in the makers of VR platforms such as Facebook. A more interesting play that depends more so on the adoption of VR as a whole instead of VR as an ecosystem or a single piece of VR hardware may be an investment in processor manufacturers.
Disclosure: I am/we are long FB.
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.