Virtual reality (VR) may be off to a slow start with consumers, but investors only need to scratch beneath the surface to see how many technology companies are already pushing ahead on VR.
The combined augmented reality and virtual reality market is expected to be worth $13.9 billion this year -- but in just three years, it's forecast to grow by an order of magnitude reaching $143.3 billion in 2020, according to IDC. And while much of the focus is on headsets and controllers right now, it's likely to be software makers and platform creators that benefit the most.
Image source: Oculus.
"AR and VR headsets get most of the media attention right now, but the hardware is only as good as the software and services running on it," Tom Mainelli, IDC's program vice president for devices and AR/VR, said recently.
That's why investors would be wise to consider Alphabet (GOOG 0.37%) (GOOGL 0.35%) and Facebook (META 1.54%) for their VR potential. Forget that these are among the biggest players in the broader tech space for a moment, and focus instead that they are pursuing VR from a different angle than most of their competitors.
Why Alphabet is a top virtual reality stock
Ignore Google Cardboard. You can even set aside Google's latest headset, Daydream View, if you'd like. Instead, think about hundreds of millions of smartphone users going to a Google-created platform for nearly all of their VR content.
Google launched its VR hub, Daydream, last year, and while it hasn't taken the smartphone market by storm yet, it doesn't have to -- at least not yet. This first iteration of Daydream was just the opening gambit in its long-term strategy to become the VR content hub for mobile users.
Remember that Alphabet built out its dominance in the smartphone space not with hardware, but with a platform (Android); Daydream could ultimately work in the same way. Already, there are over 100 Daydream VR apps available to customers, offering everything from gaming to movies, from the NBA and NFL to The New York Times, and more.
The big opportunity here is that no one else has the same reach that Alphabet does in the smartphone space. Daydream could become the gateway that brings more users into VR, and Alphabet could monetize this advantage in the same way it does with Android -- through ads and paid apps (about one-third of the Daydream apps cost money right now).
Alphabet is keenly aware of the capacity for software and services to generate massive revenues, and I think the company's early focus on mobile VR -- through Daydream -- is an attempt to get out ahead of all of its competitors.
Why Facebook is a top virtual reality stock
Just as we did with Alphabet, let's set aside the case for Facebook's VR hardware --- through the Oculus Rift -- for now. Instead, focus on the company's long-term view for VR:
"This is a good candidate to be the next major computing platform. It's worthy of a lot of investment over a long period," Facebook CEO Mark Zuckerberg said in a Bloomberg interview last year.
Zuckerberg admits that VR could take 10 years or longer to take off, but his company didn't spend $2 billion on Oculus solely to sell cool headsets -- Facebook's also using the hardware to accelerate the development of software and services.
While it's easy to get caught up in the Rift hardware, its weak sales numbers, and the recent departure of Oculus' founder Palmer Luckey from Facebook, remember that the social media powerhouse is still at the beginning stages of its VR push. It first wanted to enter the hardware market to help spur demand for software. As Zuckerberg noted last year, "The next phase is building the next great software experiences."
Long-term investors looking for the top stocks in VR would be wise to focus on these software plays -- and remember that it's likely to take awhile for this market to truly come into its own.
