Virtual reality is one of the more exciting trends in technology. The industry remains in its infancy, but several companies are positioning themselves to take advantage of the growing demand for VR headsets and content. Facebook and NVIDIA are popular picks, and for good reason: Both companies could play major roles in the VR economy.
The only other option
If you want to use a high-end virtual reality headset, such as Facebook's Oculus Rift or HTC's Vive, you'll need a PC equipped with a powerful graphics card. Right now, there are only two companies offering such a card, and AMD is one of them. That gives it an opportunity to grow its graphics business substantially in the months and years ahead.
AMD's share of the graphics card market lags behind that of market leader NVIDIA by a sizable percentage. In the first quarter of the year, AMD captured just 22.8% of the market compared to NVIDIA's 77.2%, according to Jon Peddie Research. But AMD has an opportunity to claw back market share by capturing the low-end segment.
AMD's Radeon RX 480 has received fairly strong reviews since it went on sale late last month. The graphics card is capable of powering today's virtual reality headsets, while retailing for just $199. That makes it the most affordable virtual reality-capable graphics card on the market, as NVIDIA's competing GTX 1060 is 25% more expensive.
AMD could also benefit from Sony's forthcoming PlayStation VR. The Japanese gaming giant's VR headset plugs into its PlayStation 4 video game console rather than a PC. Gamers who wish to use Sony's headset won't need to buy powerful graphics cards; instead, they just need consoles. AMD's chips power the PlayStation 4, and increased demand for the console could translate into additional revenue.
From a valuation perspective, AMD is inexpensive. Admittedly, it isn't profitable, and after rallying upwards of 45% in the last four weeks, it isn't as cheap as it was when I recommended it last month. Still, its enterprise value to trailing revenue hovers near 1.7, considerably lower than Facebook's and NVIDIA's. Its trailing price-to-sales ratio, at just 1.4, is similarly modest.
A new way to play
Increased demand for the PlayStation 4 could benefit AMD, but as the maker of the console, Sony could capitalize to an even greater extent. To date, the PlayStation 4 has sold more than 40 million units, and that's helped Sony reward shareholders. Year-to-date, Sony shares have risen more than 23%, outperforming the broader market.
In its fiscal year ended March 31, Sony's video game business generated less than 19% of its revenue, but brought in almost one-third of its operating income. If Sony's guidance proves accurate, it will bring in 45% of its operating income this fiscal year.
PlayStation VR will make its retail debut on Oct. 13. It will work with existing PlayStation 4 consoles, but could also entice some gamers to upgrade. Although Sony has yet to formally unveil it, it has confirmed that it plans to release an upgraded version of the PlayStation 4 at some point in the near future. That extra horsepower could dramatically improve the VR experience.
At $399, the PlayStation VR is expensive, but is cheaper than other competing solutions (Facebook's Oculus Rift retails for $599). By itself, the PlayStation 4 is less expensive than a high-powered PC with a capable graphics card, and is easier for the average consumer to setup and use. Moreover, Sony has video game studios and partnerships it can leverage to create quality content for its headset.
Trading with a price-to-earnings ratio near 32, Sony may not look like a bargain, but it's cheaper than other names in the space. And on the basis of other valuation metrics, including enterprise value-to-trailing revenues and price-to-sales, Sony is cheaper than AMD.
Of course, Sony is a complex business with many other segments, but with gaming accounting for an increasing share of Sony's earnings, VR could emerge as a key driver for the stock in the years ahead.