Many tech companies consider virtual reality (VR) devices, which immerse users in digital worlds, and augmented reality (AR) devices, which digitally enhance our real-world surroundings, to be the next major computing platforms. However, many VR and AR products are still considered niche devices that are either too pricey or too cumbersome for mainstream users.
But that could all change over the next few years as more advanced chipmaking and display technologies hit the market. If that happens, the global AR and VR markets could grow at a compound annual growth rate (CAGR) of 42.9% between 2020 and 2030, according to Research and Markets.
Those bullish estimates are impressive, but it can be tough to spot the top plays in these nascent markets when the products aren't flying off the shelves yet. So today we'll cut through the noise and identify five tech companies that will benefit from the secular growth of the AR and VR markets.
Facebook (FB 0.71%) established a first-mover's advantage in the VR market when it acquired Oculus VR for $2 billion in 2014. It launched its first consumer VR headset for PCs in 2016.
But over the past three years, Facebook has focused on developing stand-alone VR headsets that don't require high-end PCs or smartphones. Those efforts started with the Oculus Go in 2017 and continued with the Oculus Quest in 2019 and the Oculus Quest 2 in 2020.
Facebook sold 1.1 million Quest 2 headsets in the fourth quarter of 2020, according to SuperData, making it the market leader by a mile. Sony, which ranked second, only shipped 125,000 PSVR headsets.
That's a promising start, but Facebook still generated 98% of its revenue from ads last year. The remaining sliver came from its "other" business, which primarily sells its Oculus headsets and Portal smart screens. Its "other" revenue rose 72% to $1.8 billion in 2020, and it attributed most of that growth to robust demand for its Quest headsets throughout the year.
Facebook also reportedly plans to release its AR glasses, which were developed with EssilorLuxottica's Ray-Ban, later this year after nearly four years of development. However, consumers might not be that eager to buy the high-tech specs, which may include facial recognition features, amid the ongoing privacy concerns about Facebook's platform.
Apple (AAPL -1.07%), which is positioning itself as the "anti-Facebook" by allowing its users to opt out of data tracking apps in an upcoming iOS update, will also reportedly launch an AR headset in 2022, and a lighter pair of AR glasses in 2023.
Apple has a history of disrupting markets it didn't create with simpler, consumer-friendly devices -- as it did with MP3 players, smartphones, tablets, and smartwatches -- so it could finally be the company that turns AR devices into mainstream consumer devices.
Successfully launching a new line of AR devices would benefit Apple in four ways: It would reduce its dependence on the iPhone, tighten its grip on its users with yet another hardware device, extend its services ecosystem with new AR applications, and help it keep pace with Facebook, Microsoft, and other tech giants in the AR market.
The creation of a new AR ecosystem could also pave the way for Apple's long-rumored launch of a driverless electric car within the next few years. Those cars could be tightly tethered to Apple's software and AR services.
3. Qualcomm, 4. Lumentum, and 5. Himax
Qualcomm, the world's largest producer of mobile chips and baseband modems, already supplies its Snapdragon chips for VR headsets like the Oculus Quest 2. It also provides Snapdragon-based reference designs for VR and AR devices, which enable OEMs to quickly produce their own headsets.
Lumentum currently provides 3D sensing chips for Apple's iPhones and other high-end smartphones. AR headsets will require more of these chips to detect 3D surfaces.
Himax generates most of its revenue from display driver ICs for LCD screens, but it also produces liquid crystal on silicon (LCOS) chips, which block light in headsets with reflective crystals; wafer-level optics (WLO) components, which are used to build smaller optical chips for cameras; and other components for depth-sensing cameras.
Demand for Himax's non-driver components should rise as the VR and AR markets expand, and gradually reduce its overall dependence on its slower-growth display driver IC business.
The key takeaways
Investors shouldn't buy shares of these companies based on their potential growth in the AR and VR markets alone. All five of these companies still generate most of their revenue from other businesses that aren't related to AR and VR headsets and applications -- so investors should dig deeper before pulling the trigger.
But over the next decade, the secular growth of the AR and VR markets could unlock fresh growth opportunities for all these companies.