This article was originally published June 24, 2015. It was updated April 13, 2016, to better reflect ongoing developments in the virtual reality space.
Facebook's (NASDAQ:FB) Oculus Rift made its official debut in March 2016. The headset isn't the first mass-market virtual reality solution -- Samsung's Gear VR and Google Cardboard have already accomplished that -- but, unbound by the constraints of a smartphone, it offers a far more compelling experience.
While the Oculus Rift is aimed at PC gaming enthusiasts, it could eventually find a much larger audience. Business Insider Intelligence believes that more than 26 million virtual reality headsets will be sold in 2020, giving the industry a compound annual growth rate of around 100%. Research firm Marketsandmarkets projects that sales of virtual reality products will reach $15.89 billion by the end of the decade. Strategy Analytics believes more than 1.7 million high-end virtual reality headsets (a category that includes the Oculus Rift) will be sold in 2016.
Investors looking to get exposure to the Oculus Rift may be tempted to buy shares of Facebook. Although its success will only benefit the social network, Facebook's sheer size ensures that Oculus Rift will remain a relatively tiny portion of Facebook's total business, at least for the foreseeable future. Two other companies stand to gain much more.
A new PC accessory
Unlike many other consumer electronics, the Oculus Rift is not self-contained, but rather, an accessory. In order to use it, buyers need to plug it into a PC -- and a fairly powerful PC at that.
Oculus Rift users need a Windows PC equipped with, at the very minimum, an Intel i5-4590 processor and 8GB of RAM. That's a hurdle, but not an overly daunting one -- most mid-level desktops, like an $800 Dell Inspiron, make the cut. The real barrier comes from the need for a relatively high-end, discrete graphics card. Oculus Rift users need at least an Nvidia (NASDAQ:NVDA) GTX 970 or an AMD (NASDAQ:AMD) R9 290.
Pricing on components varies, and in general, the cost of PC parts drops over time, but both video cards currently retail for around $300.
How AMD and NVIDIA could benefit
That sounds like a huge hurdle, and it could prevent rapid adoption. But millions of PC gamers already spend hundreds of dollars on discrete desktop graphics cards every year -- indeed, it's a major part of both AMD's and NVIDIA's business.
NVIDIA has started to wade into other markets, including autonomous vehicles and drones, but it continues to derive almost all of its revenue from GPUs. Last quarter, NVIDIA's GPU business generated nearly 85% of its revenue. Its GPU-related revenue rose 10% on an annual basis, which NVIDIA attributed to increased demand from PC gamers. During its subsequent earnings call, NVIDIA's CFO said that gaming-related revenue totaled $810 million, or about 58% of its total revenue.
NVIDIA is the market leader when it comes to discrete graphics cards, capturing the vast majority of sales. According to John Peddie Research, NVIDIA's discrete cards accounted for around 78.8% of the market last quarter, up from around 65% in the fourth quarter of 2013.
AMD lags NVIDIA in terms of market share, but it's the only other firm offering discrete graphics cards. AMD represented the remaining 21.1% of the market last quarter. Unfortunately, AMD does not break out its discrete graphics business as a separate segment, instead lumping it in with its traditional PC processors. This combined segment -- AMD's Computing and Graphics -- generated nearly 50% of AMD's revenue last quarter, though it operated at a loss. AMD investors have to contend with the company's increasingly precarious position in the traditional processor market, but rising demand for its graphics cards could provide some upside.
Both firms have spoken positively about the upside virtual reality affords them, though they've been relatively modest in their expectations, at least in the near term. NVIDIA CEO Jen-Hsun Huang in November 2015 described his team as being "super excited about VR" but admitted that "[shipments of virtual reality headsets haven't] really started yet, and [so] it's prudent to wait and see." Yet, he admitted that his "expectation long-term is that VR is going to be a very powerful growth driver for [NVIDIA]."
On the company's earnings call in February, Huang declared that NVIDIA wasn't forecasting "any upside in VR. However, there's no way but good that VR will bring to our business."
AMD CEO Lisa Su said her company was "working very actively in the VR space" during AMD's third-quarter earnings call. Last July, AMD founded the VR Council, a consortium of parties interested in virtual reality, and earlier this month the VR Council joined the Immersive Technology Alliance, a more broad-based trade organization centered around immersive technologies, including virtual reality.
In January, Su noted the growing momentum for the company's discrete graphics cards, and said she expected it to continue throughout 2016. She cited the Oculus Rift as a key driver.
Of course, the technology remains in its infancy, and the size of the market remains unproven. But if the Oculus Rift catches on, the demand for high-end graphics cards should rise, and that could boost both AMD's and NVIDIA's bottom lines.