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Is Facebook’s Next Growth Story A (Virtual) Reality?

By Jamal Carnette, CFA – May 9, 2015 at 9:40AM

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Oculus VR has a tentative commercial release date.

Facebook's Oculus Rift headset will be released commercially in early 2016. Source: Oculus VR/Facebook.

After an initial rough patch, exacerbated by a flawed IPO rollout, shares of Facebook (META -0.74%) are on a roll. If you had bought the company at the initial public print of $42.05 per share, and would have been patient enough to hold though the nadir of $18 per share, you'd be sitting on an 85% gain. If you'd were lucky enough to buy at its low, you would have tripled your investment.

Facebook's abrupt turnaround can be attributed to favorable investor sentiment and continued operational improvement. During its IPO, the social media giant was dependent upon a single company -- social game specialist Zynga -- for nearly 12% of its revenue, so much so that Facebook cited the relationship as a risk factor in its S1 IPO registration statement. In its last fiscal year, the greater category of payments and other fees only accounted for 7.8% of revenue as its core advertising business has grown via increased users and better mobile monetization.

But perhaps the most interesting story is Facebook's acquisition strategy. CEO Mark Zuckerberg has been aggressive in his pursuit of supporting businesses, spending $1 billion for Instagram and $17.2 billion for messaging service WhatsApp. 

Meanwhile, Zuckerberg's newest acquisition -- Oculus VR -- could be Facebook's next big growth story.

Oculus' headset is a go in 2016
For those unfamiliar with the product, the VR in Oculus VR stands for virtual reality. The company manufactures a virtual-reality headset dubbed Oculus Rift that offers an immersive, lifelike experience. While the initial focus has centered on gaming, the possibilities are vast -- critical procedures for surgeons, soldiers, astronauts, and pilots could be simulated, preparing those people for critical and potentially dangerous tasks more effectively and realistically.

After working with developers, Facebook recently announced the Oculus Rift headset would be made available in the first quarter of 2016. And it's more than just the headset: In a blog post on Wednesday, Oculus VR promised to deliver "compelling content, a full ecosystem, and a fully integrated hardware/software tech stack designed specifically for virtual reality." While the release did not discuss price, it teased the E3 conference in June and promised additional details in the weeks ahead.

Will Zuckerberg sell 100 million Oculus Rift headsets?
While Facebook executives barely mentioned the Oculus Rift during their first-quarter earnings conference call, outside of CFO David Wehner mentioning the product "is very much in the development stage," Zuckerberg was more candid with his plans for Oculus during last year's third-quarter conference call.

During the question and answer segment, he said "it needs to reach a very large scale, 50 million to 100 million units before it will really be a very meaningful thing as a computing platform." Later, after warning it will take longer than two to three years to move that number of units, Zuckerberg cited a decade as an acceptable time frame.

While it is difficult to create a new product and supporting ecosystem from scratch, Zuckerberg faced long odds before in his quest for social-media dominance, and that worked out well for him and his investors. In the end, Oculus VR could be more important to Facebook's investors than Instagram or WhatsApp combined.

Jamal Carnette owns shares of Apple. The Motley Fool recommends Apple and Facebook. The Motley Fool owns shares of Apple and Facebook. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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