VR is here to stay. But how to invest in virtual reality? Here’s everything you need to know before you spend your money.
Imagination matters. In fact, it’s a necessity for survival. The earliest humans survived because they imagined the coming winter. They stockpiled crops and resources in advance.
As technology came into the fold, we discovered more sophisticated ways to capitalise on our imaginations.
One early example dates back to the late 1700s. Word spread of a mechanical automaton that could engage players in a game of chess. The robot, called ‘The Turk’ astounded players with his mechanised moves. His hands and arms could fully articulate to move bishops and kings across the board. Adept players were confounded by the skill of the machine.
Eventually, people learned it was a hoax. The robot was nothing more than an elaborate prop operated by another man sitting inside the desk where the Turk sat. Once people discovered the truth, something interesting happened. The popularity of The Turk grew. People wanted the illusion.
Differences Between Virtual, Augmented And Mixed Reality
Software developers have taken notice of our fascination with constructed reality. In 2014 Facebook purchased virtual reality (VR) company Oculus Rift for $2 billion. ‘We look at that, and we see the beginning of a platform,’[i] remarked Zuckerberg at Facebook’s F8 developers’ conference. Sony, Samsung, Google, and Microsoft are all following suit.
Developments in VR are often discussed in the context of similar innovations like augmented reality (AR) or mixed reality (MR).
Virtual Reality vs Augmented Reality
VR immerses the user in a new world whereas AR overlays new information upon the existing world. That is, AR keeps one foot planted in the real world. For example, a pair of transparent AR glasses might display the nutritional aspects of an apple while you shop.
Virtual Reality vs Mixed Reality
MR is a term occasionally used interchangeably with AR. If there’s any difference between AR and MR, it’s that MR offers synthetic content, which can react to reality in real-time. Here we use the term “VR” to represent all three.
A recent report from market intelligence company TrendForce projects that the VR market will reach a value of $70 billion by 2020.[ii] Investors interested in this emerging industry are asking how they can get in on the game. Here’s the answer.
Types Of Investments
Developments in this arena pull from several industries. Investors can capitalise on this trend with exposure to manufacturers and resources that provide critical functions for the technology.
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Many are familiar with semiconductors, which form the basis of most technology used today. We use these materials to enable aspects like CPU memory and processing. In fact, ‘Sales of total worldwide semiconductor producers based in the Americas grew from $33.4 billion in 1993 to over $154.8 billion in 2013 — a compound annual growth rate of 7.97 percent,’ according to the Semiconductor Industry Association.[iii] Market intelligence provider IDC forecasts a compounded annual growth rate at 3.4% through 2018.[iv] The burgeoning VR world may push this growth even higher.
Investors can participate in this growth by investing into semiconductor companies directly or into a fund with exposure to such enterprises. Recent performance in the sector has excited investors. Applied Materials (AMAT) and Lam Research (LRCX) have seen share prices rise 90% and 73% respectively within just the last 12 months.[v] These are the two largest firms in the semiconductor space by market share.
Some analysts point to strong demand for flash memory amid a shortage caused by new production processes.[vi]
Intel (INTC) is a leader in the semiconductor industry. They have long-established relationships with major brands like Dell and HP with annual sales in the $50 billion range. Today, semiconductors are in more than just computers. For example, some companies manufacture semiconductors for use in cars.
NXP Semiconductors (NXPI) is one such firm producing chips for automobile CPUs. These systems share characteristics with AR. Onboard cameras track and recognise elements in the real world for a safer driving experience. NXP illustrates how VR has practical applications beyond entertainment.
The versatility of semiconductors means the technology applies to numerous industries. One company, ON Semiconductor (ON), has embraced this characteristic. For 18 years, they have acquired over a dozen semiconductor manufacturers to become a Fortune 1000 company. These acquisitions give investors broad exposure to many areas of the industry. However, some prefer the even greater diversification of a semiconductor exchange traded funds (ETF).
With just a few hundred dollars, investors of the S&P Semiconductor ETF (XSD) can participate in the entire industry. The ETF includes all the leaders in the world of semiconductor manufacturing and technology. Other ETF investment firms like iShares (SOXX) offer similar products. PowerShares also offers a semiconductor ETF (PSI). Remember, ETFs charge an expense ratio, which is a direct cost to the investor. Choose based on this cost.
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Put a computer on a chip, and you’ve got a microcontroller. These integrated circuits are in devices that require more robust computing power. Companies manufacturing these devices will likely be key players in the VR world. Emerging technologies often push existing solutions to their limits. Microcontrollers will allow current programming to do more.
Today, Silicon Labs (SLAB) is at the front of microcontroller innovation. The company’s focus on simplified, energy saving solutions will fit squarely within the high-performance framework of AR. With 1,500 patents they know innovation.
STMicroelectronics (STM) is also a key player in this field. This multinational company of 60 years has a history in a variety of electronics. As a result, they have a rare insight to the interconnectedness of microcontrollers with other technologies. Finally, Microchip (MCHP) is another player in microcontroller technology for the professional market. Their recent acquisition of semiconductor manufacturer Atmel will broaden their reach.
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All of these integrated components aren’t much without the programming to put them to use. Modeling tools used to create lifelike 3D graphics will be more important than ever.
Research from application strategy firm Yeti shows that nearly 54% of U.S. developers are currently engaged in VR projects.[vii] Multinational software company Autodesk (ADSK) has a significant presence in this arena. More developers will move into this space as the demand for VR technology grows. Established software companies like Autodesk have the resources to develop existing and new systems around the user’s needs.
Additionally, Dassault Systemes (DSY) also builds 3D graphic software. These tools will have far reaching capabilities for developers. As more programmers turn to 3D designs, Dassault will become a major focal point.
The fundamental principle of diversification will be more important to investors than ever. At this early stage, it’s unclear where the general population will congregate when it comes to choosing a technology. There will be many platforms, programs, and providers.
Getting an early start means spreading your investment across various technologies before a clear winner emerges.
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Long-Term Investment Opportunities In Virtual Reality
While excitement about VR grows, investors must remember that we’re at the early stages. Even the rapid pace of technological development requires years or even decades to reach its potential. For this reason, it’s wise for investors to take a long-term approach to these investments. Even Facebook’s Mark Zuckerberg admitted that VR ‘won’t be profitable for quite awhile.’[viii]
Capitalising on this long-term growth means capturing all areas of the market. Think of VR as a nucleus surrounded by electrons. Theses electrons are different companies that will play key roles in the growth of VR.
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3D Spatial Audio
One example is 3D Spatial Audio. VR is all about convincing the user of an alternative reality. Realistic and believable sound are critical to this goal. Today, companies are developing new technology to make the auditory experience more real than ever.
Mixed Immersion is one example of this growing industry.
3D sound began as part of the cinema experience, designed to surround the listener and come from all directions. The result puts the listener in the experience. Mixed Immersion have taken this technology from the film industry and developed a new way of working in VR.
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VR software company WorldViz is another immersion company to watch. Located in Santa Barbara, CA they leverage technology for practical applications in engineering and education.
Companies like 3D4 Medical have come to the fore with a more pragmatic approach to VR. Rather than gaming or entertainment, these developers see the potential of VR as a learning tool. Medical students can gain previously unseen views of the inner workings of a living body. Cadavers can’t show bodily functions as they occur. However, VR solutions offer ‘a breathing model, a living creature.’[ix]
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Blending Real And Imagined Worlds
Magic Leap has taken innovation further by blending real and imagined worlds. This mixed reality technology overlays synthetic content onto real world images. That is, the viewer sees 3D rendered object within a field of view that is otherwise real.
Companies like this aren’t available to investors yet. However, investors can keep an eye on these businesses as they grow. As VR tech reaches the mainstream, many such firms will rise alongside the movement. As a result, more companies will go public to seek the financing necessary to sustain growth. Inevitably, some will fail which presents risks for investors.
Key Risks Of Investing In Virtual Reality
Not All The Players In The Arena Will Succeed
VR and similar technologies will become a larger presence in the consumer market. Despite this fact, investors are still exposed to risk. The reason: not all the players in this arena will succeed. The consumer will ultimately decide which version of the technology will become the norm. Investors can manage some of this risk with diversification. However, a closer read of the industry reveals how investors can make more informed choices.
As discussed earlier, the growth of VR technology will have substantial implications for the semiconductor industry. In the U.S. alone, semiconductor sales have experienced an average annual rate of increase reaching 14.6% between 1994 and 2014.[x] ‘The vast majority of semiconductor sales demand is driven by products ultimately purchased by consumers,’[xi] according to The Semiconductor Industry Association.
A Growing Consumer Class In Emerging Markets
Additionally, a growing consumer class in emerging markets like Asia and Latin America will accelerate this demand. As geopolitical events unfold, investors must consider how upheavals abroad may temper growth. Control this risk with investments spread across the global market. Asia Pacific is the leader with a 57.8% share followed by the Americas at 20.6%, Europe at 11.2% and finally, Japan at 10.4%.
Will The Sector Live Up To Expectations?
As with all investments, expectations are everything. While VR growth is imminent, what remains unclear is the level of growth. Estimates from Goldman Sachs illustrate the range of outcomes we could see. Under their ‘accelerated uptake’ forecast hardware and software could generate $110 billion and $72 billion respectively. However, in a ‘delayed uptake’ scenario these figures drop to $15 billion and $8 billion. If the market doesn’t meet the upper end of these forecasts, investors may flee causing share prices to drop.
Difficulties In Adoption
This range illustrates some of the difficulties involved in adoption. Some sectors like healthcare, real estate and education present steep climbs for technology integration.
In other sectors, like news media, VR could be implemented more easily. However, virtual reality journalism faces some challenges as well before it can kick off.[xii]
While VR may have plenty to offer, professionals will need to adopt a new set of skills to put the technology to use. For example, patient details require encryption for VR use in hospitals. Already tight budgets in education may prohibit widespread adoption of this innovation. Manufacturers may have difficulty communicating engineering plans across different VR technologies. Differing applications remains a major risk.
Some have deemed this risk a ‘chicken-and-egg’ problem. Content developers are reluctant to settle on a platform without broad adoption. Meanwhile, consumers will not enter the market until they see an ecosystem of apps to warrant the cost. This problem may disappoint investors anticipating exponential growth over the short-term.
Finally, many of the sectors connected to VR technology are cyclical by nature. This movement means that down periods can occur regularly and for long periods.
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Individual Companies To Invest In
Want to start now? The easiest way to play the market is with investments in individual companies. Consider established brands that have communicated a clear commitment to VR technology. This commitment must be in the form of capital investment in bringing VR to the consumer market.
One such example is Microsoft (MSFT) with their ‘Hololens’. It has been more than two years since they unveiled the VR device at the Game Developer’s Conference. The unique wireless design will appeal to a broad base. Microsoft has put its considerable weight behind the processing unit, which allows for gesture recognition and spatial mapping. Microsoft has plenty of gaming experience.
Facebook’s (FB) much-publicized Oculus Rift represents a $2 billion commitment to the future of VR. Headsets have already started shipping. Price points are high but as the manufacturing process improves the retail will likely drop. In 2017 Facebook represents just one of 10 stocks responsible for more than half of the S&P 500’s gains for the year.[xiii] Excitement for the Oculus is a primary reason for this share price performance.
Sony (SNE) has the benefit of a firm gaming foundation. By integrating their VR headset with the PlayStation, they’re tapping into a robust base of users. Marketing research firm IHS Markit has deemed the device the most popular headset for homes. Sony sold 915,000 units within the first four months of its release.
Advanced Micro Devices (AMD) VR is more than a headset. You need a powerful computer to support the experience. AMD has a thorough understanding of the technology needed to power demanding VR graphics. This semiconductor company is poised to bring VR computing capabilities to the market cheaper than most. Their secret weapon: Their Polaris chip which is one of the most powerful graphics processors on the market.
Taiwanese tech firm (HTC) sold fewer headsets than the Oculus Rift or Playstation’s unit in 2016. However, they were the only one of the three to exceed forecasted sales.[xiv] HTC may be a strong long-term investment given that they’re the only company targeting a robust Asian market with VR consumer devices. Moreover, the rising economic status of that population presents a healthy market for future sales.
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Watching The VR Market
The VR market is young. Investors will need to watch how it takes shape. What’s the best way to do this? Keep an eye on companies that are putting VR tech to use in creative ways. Often these small players drive the zeitgeist. Curiscope based in the UK sells t-shirts that interface with a smartphone to display a 3D rendered view of vital organs.
Blend Media is another creative source illustrating how VR can become a marketing tool. The company works to help client deliver a brand experience through immersive, 3D VR tools offering 360 degrees of content.
Finally, Blippar is helping brands equip themselves with technological solutions to engage customers. Users download the Blippar app and then scan various goods to reveal content about the item. At the start of 2016 Bloomberg named the company as one of the top UK Business Innovators.[xv]
All of these companies provide insight to investors because they represent the viability of the industry.
The time to invest is now. The industry is still nascent which provides ample upside for the diversified, long-term investor.
In the end, the automaton Turk was tucked away in storage but VR is here to stay.
Would You Invest In Virtual Reality Today?
Leave your thoughts in the comment section below and analyse our VR investment portfolio.
[vii] Wegert, Tessa. ‘4 Ways VR Will Impact the Future of Tech Careers.’ The Muse. 2017.
[ix] Irene Walsh. ‘This augmented reality tool could totally change med school.’ Insider. YouTube. 2017.
[xiv] Needleman, Sarah. ‘‘Pricey Virtual-Reality Headsets Slow to Catch On.’ The Wall Street Journal. 2017.