The Virtual Reality Revolution is Just Starting, Are Your Stocks Participating?

The Virtual Reality Revolution is Just Starting, Are Your Stocks Participating?

 

Summary:

  • Facebook expects virtual reality to be the next big computing platform.
  • Applications are not only limited to video games; sectors from healthcare to real estate could bedisrupted.
  • Early indicators of demand seem to be strong for both virtual and augmented reality (hardware and software).

Startups and public companies are in a race to figure out what will be a mixed reality…hoping to grab a slice of the $80+ billion virtual and augmented reality market by 2025…At least according to Goldman Sachs estimates.

Expectations naturally differ across the street, but the current level of capital in the sector is undeniable. TechCrunch recently reported that virtual and augmented reality (VR/AR) investments have clocked in at over $1.1 billion in 2016 thus far. The future of this sector also looks hot, as HTC recently announced that they and a team of 28 venture capital funds have created a coalition of capital to be invested in VR & AR. These funds will bring over $10 billion into the industry over the next few years. This is not a brand new trend, however. VR and AR have been gaining traction in the public and private investment world for some time now, as displayed below. While VR is outpacing AR search wise, according to Google, don’t assume that digital information overlaid in our physical world will not be important.

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On the augmented reality side, these applications are a lot closer to home than you might think. They are actually in your smart phone already. For example, Snapchat just recently updated its app with 3D stickers that can be attached to objects in motion…a natural follow-up to rainbows flowing out of one’s mouth. Another app, Pokémon Go by Nintendo (TYO: 7974), was just released to their fan base. “Go” allows users to hunt for digital creatures (Pokémon) in their physical environments. Nintendo investors applauded the release with an 30%+ move higher, as worldwide demand for the app was so high that Nintendo’s servers reportedly crashed – multiple times in fact. Both of these companies are valued at just about $20B USD and represent two of the top four most popular apps in the Apple and Google app marketplace now.

In VR, the trend is equally strong. In this reality, the Oculus Rift is the clear product to beat. Facebook, which bought Oculus for $2 billion in 2014, is pushing this technology forward. Other key players include the Vive by HTC and Samsung’s Gear. The immersive experience that these products offer is game changing, especially for the videogame business. Gamers will be the first to use this technology and will likely make up the majority of the spending by 2025.  According to the same Goldman Sachs report, gamers will make up about 33% of the total market, spending $11.6 billion. Other sectors that are expected to leverage fully immersive VR experiences include the live events and video/film business.  This technology has started to hit the shelves of local consumer electronics stores, in addition to the virtual shelves of e-commerce websites.

Gaming applications from PC experiences to phone apps is just the beginning. There remains 67% of the market that still needs to be addressed.

Defense Applications

With billions of dollars spent on U.S. defense annually, a fraction of this has started to find its way into VR/AR. Starting back in 2012, the U.S. Army began testing out VR training for soldiers.  Since then, mixed reality applications have begun rolling out to military bases domestically and abroad.

The Dismounted Soldier Training System is a VR battlefield simulator currently being used by the U.S. military. Developed by Intelligent Decisions, the system includes VR goggles, head, arm and leg sensors (for crawling, crouching and standing), and communication devices in order to completely mimic a real world battle. Room clearing and firefights are just some of the scenarios Intelligent Decisions offers. The value proposition, according to developers, is that applications like this save the government: (1) time by being able to run multiple scenarios quickly, (2) money by using physical resources like ammunition fuel more efficiently after virtual training is complete, and most importantly (3) lives by providing soldiers advanced training.

Other projects are live too. The Oculus Rift is reportedly being used by the Norwegian Armed Forces during tank training. An Oculus is a perfect solution, because a 360-degree field of vision is critical for tank drivers. While it is only a prototype, the savings are real. Conventional camera systems for tank navigation could cost up to 50x the cost of their Oculus hack.

Back in the U.S., Raytheon is also testing out the effectiveness of VR. Also leveraging Facebook’s technology, Raytheon is putting U.S. Army Air Defense Artillery School trainees to the test. While not simulating a battle on the frontline, integrated air and missile defense systems are also highly complex and expensive. It’s another role in defense that requires practice and precision—key selling points for Raytheon.

Similar techniques in VR are being applied to training the next generation of doctors.

Healthcare

The Healthcare field is another one of the largest sectors of the U.S. economy, roughly 17% of GDP or $9,500 per person per year. Accordingly, there are areas to improve upon and companies like 3D Systems are giving it a go.

While the core business of 3D Systems is in the 3D printing market, they saw the value proposition that VR offered. 3D Systems bought Simbionix, a medical practice simulation company, for $120 million in mid-2014. Since then, the company has developed a variety of VR oriented training solutions. For example, their RobotiX Mentor is the only robotic surgery simulator. The RobotiX Mentor provides medical students a fully immersive and life-like, but risk-free, practice application with “true-to-life graphics and tissue behavior”. Content wise, 3D Systems/Simbionix plan to continue developing an “ever-expanding library of modules” for their curriculum, as they see VR becoming more and more pervasive in medical schools.

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Other sectors, like real estate, are leveraging the engaging experience VR brings to the table.

Real Estate

Small and large real estate groups alike are looking at how they can adopt this technology. Sotheby’s, one of the biggest players in the real estate market, is already gaining efficiencies with VR.

Fortune ran a profile on The Matthew Hood Real Estate Group at Sotheby’s International Realty, where they highlighted the cost of doing a VR home scan. Fortune’s sources indicated these scans run between $300-$700 for a high-end home. The alternative is having a photographer come out and shoot the home. For reference, the cost of a photographer is roughly $500 to $1000 per high-end property, delivering only 15 to 20 final images. While these rates are sure to vary across quality and freelancer, VR seems to be a perfect content solution for agents trying to narrow down home choices for a client in addition to coordinating home showing schedules with busy and/or international clients. Considering the 845 offices in 63 countries and territories worldwide that Sotheby’s operates in, there is sure to be a material amount of time during the showing process that could be saved with VR. At the time of the report, they were only live in a few cities, but this will grow.

portable panoramic camera sample in technical exhibition.

Similarly, but on the drafting/design side of real estate, more VR applications are being launched.  When properties are still on paper, there are startups out there attempting to create an experience of actually being in the property during the design phase. Applications like this could revolutionize design, expedite workflows, and impress end clients.

Overall, the jury is still out when it comes to the future of VR. As of now, there is limited data to work with. All of the big players (Facebook, HTC and Samsung) have yet to release specific sales numbers for hardware and software products. As referenced earlier, Goldman Sachs expects VR/AR software and hardware to be a $80 billion business by 2025; this, however, is their base case. Their optimistic scenario with “rapid” adoption brings them to estimated revenues of $182 billion annually…and a “delayed uptake” market opportunity of just $23 billion. For context, the desktop and video game console market is worth an annual $62 billion and $14 billion respectively. The variance in expectations is displayed below.

As the data trickles in, investors should remember this is just the start. Facebook/Oculus just began shipping their VR headset product in Q1 2016 with 50 games, according to Facebook’s Q1 2016 earnings call transcript. For context, the Xbox One console, by Microsoft, has over 800 games – so there is a lot of room for Facebook/Oculus to grow their content library just on the games side. More importantly, Facebook CEO Mark Zuckerberg stated in the call that, “we don’t expect VR to take off as a mainstream success right away. I really want to emphasize that. Most Rift early adopters are gamers and developers.” The main take away should be that Zuckerberg believes that, “VR is going to be the next big computing platform”, and he is making the investment “to lead the way”.

Ultimately, the broad take away is that VR has the potential to disrupt multiple business models, engage clients more, and provide a superior learning experience, not to mention revolutionize the video game market.

Fariba Ronnasi
CEO, Elite Wealth Management

Full Disclosures: http://elitewm.com/disclosures/
This article is not intended as investment advice. Elite Wealth Management or its subsidiaries may hold long or short positions in the companies mentioned through stocks, options or other securities.

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