NVIDIA (NVDA -2.66%) is poised to benefit from the growing virtual reality market, which is expected to be worth $70 billion by 2020. And the company has two advantages in the space already: superior graphics processing power and the possibility for graphics processing units (GPUs) to power VR systems from the cloud.
But NVIDIA is also facing some headwinds in the virtual reality (VR) market, and some competition from rival chipmaker Advanced Micro Devices (AMD -2.18%).
Let's take a look at three things that hurt NVIDIA's VR pursuits:
PCs aren't ready for VR
One of the biggest roadblocks to NVIDIA's VR pursuits comes from the fact that hardly any computers currently on the market can support virtual reality from devices like the Oculus Rift.
NVIDIA said earlier this year that less than 1% of computers sold this year are VR-ready. That's a terribly low percentage, and it shows just how long it may take NVIDIA to make money from this market. NVIDIA says that PCs will need to be about 7 times more powerful than they are now to handle the complex virtual reality graphics.
The upside is that NVIDIA is working with about 100 PC makers to bring VR-ready PCs to market. But with such a small percentage of PCs able to handle VR right now, investors will have to wait a while before sales for GPUs for VR start adding significantly to NVIDIA's bottom line.
Things are too expensive right now
It's not just that NVIDIA's processors are only fueling a handful of VR-ready PCs, but also that consumers aren't ready to pay the money for VR systems.
The cheapest VR-ready PCs cost about $1,000 -- which is about $640 more than the worldwide average cost for a new PC. And a recent CNET review of VR-ready PCs found that "the sweet spot for price and performance is right around $2,000."
NVIDIA won't be able to benefit from GPU sales for VR-ready computers until their costs start coming down, and it could be a while before technology companies are able to make that happen.
The company's not without its competition
NVIDIA is a leader in the GPU space, but rival AMD has ramped up its virtual reality offerings over the past several months.
AMD announced a pair of certification programs back in March, called the Radeon VR Ready Premium and Radeon VR Ready Creator tiers for developers. These create standards for VR creators to adhere to that their content will work well with AMD's Radeon GPUs.
And the company is already winning in the gaming console market, which could become a prime VR market. AMD's processors are found in both Microsoft's Xbox One and Sony's PlayStation 4. The company says this gives it about 83% market share in home entertainment virtual reality systems.
AMD, and not NVIDIA, could make some big gains in GPU sales if gaming consoles continue to evolve as the go-to VR platform.
Investors should remember that the first two hurdles apply to the entire VR industry as a whole, and not just NVIDIA. That means the company won't be able to do much to speed along VR adoption or make it cheaper (but neither can its rivals). NVIDIA is certainly readying itself to benefit from VR, but it's not close to seeing big returns quite yet.
NVIDIA makes the bulk of its total revenue from sales of GPUs in its gaming division, so the company is clearly on the right path by homing in on the VR market. But virtual reality is still an unproven segment, and no one clearly knows when consumers will adopt it, or if they ever will.
For that reason, I wouldn't invest in NVIDIA entirely on the company's VR outlook. As a leading GPU provider, the company is likely to benefit from virtual reality's growth -- but there's plenty of time for AMD to make big gains too, or for VR to fizzle out on its own.