3 Leaders In A Booming $182 Billion Market

Stephen King’s The Lawnmower Man was adapted for the big screen in 1992, the story of a disabled landscaper hooked up to a virtual reality landscape and experimental drugs. The VR experiment boosted the title character’s intelligence exponentially and even helped him talk to the opposite sex. 

I watched this moving having just turned 16 years old, and I would be forever hooked on the potential of virtual reality.

#-ad_banner-#VR and augmented reality have remained more fiction than fact — until recently. The 2012 Kickstarter campaign for headset maker Oculus Rift raised millions but still lacked the software development to complete the experience.

Software and hardware are now coming together and the momentum could create a market to rival the iPhone. 

The coming technological leap in consumer electronics could turn a decades long dream into reality… and I’ve found three companies that could benefit big time.

This Tech Revolution Is Nearly A Reality
Virtual reality and augmented reality (AR) are developing fastest in gaming and entertainment but potential uses can be found in nearly every sector from battlefield training for the troops to buying a home. 

There are more than 1.2 billion gamers in the world, an easy market for the headset makers and software developers that can bring people into the game. On the other end of the VR spectrum, software creator MindMaze has created an immersive virtual-reality therapy that, according to the company, is helping patients regain motor and cognitive function faster than with traditional physical therapy.

VR hardware revenue is expected to reach $2.3 billion this year on 9.6 million headsets. Growth is forecast to boom into the future with estimates of 110 million headsets shipped annually by 2020.

Goldman Sachs estimates a base case for the market of $80 billion with $45 billion in hardware and $35 billion in software by 2025. On the high-side, the market for VR tech could reach $182 billion… that’s 30% more than Apple iPhone sales over the past year. It’s also three-times the global tablet market and more than 15x the $11.6 billion gaming market.

As Pure As It Gets In The VR Play
The smart money is already getting in on the next generation of VR players. Venture capital firms have bet $3.5 billion on VR startups in just the last two years. Google-parent Alphabet (Nasdaq: GOOG), Facebook (Nasdaq: FB) and Sony (NYSE: SNE) have all spent heavily on VR with their own products.

But these mega-cap companies are poor bets on the booming space. Each has diversified revenue streams and VR represents little more than a blip in their sales forecasts.

The more focused bet will come from smaller companies with sales that could explode as they grab market share as VR hardware or software players.

GoPro (Nasdaq: GPRO) could have the most to gain on the VR market with its camera mounts for up to 16 cameras and spherical video capture technology. The company is the smallest of the three picks and has the most to gain on the new source of revenue.

While GoPro has struggled to bring new products to market to match its earlier successes, it still sells six of the top 10 products in the digital camera/camcorder space. The company’s cameras are broadly for VR capture on partnerships with Google and Facebook. The company also has a strong growth trajectory in drone technology.

Shares have plunged 44% over the last year as trailing sales have fallen to $1.24 billion from $1.62 billion in 2015. The company has no debt and $472 million in balance sheet cash, more than a fifth of the market cap.

Distributor sales jumped 140% in China during the first half of the year against the same period in 2015 and the company signed a partnership with India’s largest electronics retailer to put products in 1,800 stores.

Nvidia Corporation (Nasdaq: NVDA) makes gaming graphics processors and graphic cards that will be critical to the virtual environment in VR. The company has formed partnerships with 250 others to create new VR applications for consumer and enterprise use.

Not only does the firm have a clear future in VR but the evolution in connected driving is turning the car into what management is calling a, “supercomputer on wheels.” The company’s Tegra processors are being used extensively in car entertainment systems. Free cash flow has doubled over the last three years to $1.1 billion. The company has no long-term debt on its balance sheet and has repurchased almost $2.3 billion in shares over the past three years.

Advanced Micro Devices (Nasdaq: AMD) is another quality producer of graphics processing units that could be used heavily in VR applications. Because of the high-tech processing needs, hardware producers are limited to higher-end suppliers like AMD and Nvidia for processors and graphic cards.

The company recently released its new Polaris GPU graphics card and saw second quarter revenue jump 23% from the prior quarter. While the company doesn’t have the scale or R&D of its larger peers, it also doesn’t have the massive capital spending needs. Shares of AMD are also relatively cheap at just 1.4 times trailing sales compared to a 7.3 times multiple on shares of Nvidia and a multiple of 3.3 times on Intel (Nasdaq: INTC).

Risks To Consider: While the three companies are a more focused bet on VR than larger players, they still face competition in other segments as well.

Action To Take: Position in one of the biggest tech trends of the next decade with three companies primed to benefit from the virtual revolution.

Editor’s Note: Have you heard this breaking story? In an unprecedented move, the Department of Health and Human Services has just green-lighted $4.3 billion to fight this threat. It made the move after a Senate Subcommittee meeting where a Harvard MD stood up and said, “This must become a national priority.” Full story here.