There are several valid reasons Facebook (NASDAQ:FB) is approaching the vaunted $100 per share mark even sooner than many of us expected. CEO Mark Zuckerberg finally confirmed that it was time to take the wraps off Facebook's wildly popular Instagram property and fully monetize it, and most pundits expect it to become a multi-billion dollar entity in its own right in the next few years. Some have even suggested Instagram will generate nearly $6 billion in just five years.
Of course, all the buzz around Instagram came on the heels of Facebook utilizing its highly successful – and highly lucrative – video ads across its site. And with nearly 1.5 billion monthly average users (MAUs) as of Q2, 1.31 billion of which were of the mobile variety, video was a catalyst for yet another knockout quarter when Facebook shared its Q2 results after the close on July 29.
Which brings us to Facebook's sometimes overlooked virtual reality (VR) headset Rift from Oculus. It's easy to gloss over Facebook's foray into VR given all its other positives, but according to some new research, the $2 billion spent on Oculus may prove to be an absolute steal.
By the numbers
Though considerably more conservative than some estimates, a recent report from Business Insider gives a sneak peek into just how quickly the VR market is expected to grow. This year, VR hardware is will generate a paltry $37 million in sales: hardly worth getting excited about. However, due in part to Facebook's expected unveiling of its Oculus Rift headgear early next year, 2015's sales are expected to be a very small drop in a very large bucket.
With an estimated compound annual growth rate (CAGR) of 99% between now and 2020, the VR hardware market will generate just shy of $3 billion in 2020. Not surprisingly, the rapid growth expected for virtual reality headgear will come from the world's 1.2 billion gamers. A $3 billion market in about four-and-a-half-years may not elicit much investor excitement, nor should it in and of itself.
When things really get interesting for Facebook, and other VR solutions, is the burgeoning market expected beyond just the hardware. As a whole, virtual reality, along with "augmented reality" (AR) like Microsoft's (NASDAQ:MSFT) highly touted HoloLens which completely immerses users into the real, but "augmented," world around them, is expected to absolutely explode.
One study estimates that in five years, the combined VR and AR markets will generate a staggering $150 billion in sales. It should be noted that of that total, VR is expected to garner a "mere" $30 billion. The difference in the hardware and total VR market forecasts lies with other revenue sources like game sales and the ads that are likely to find their way into downloaded games.
And there's more
Zuckerberg made it clear when he announced the deal for Oculus in March of last year that gaming was just the tip of the iceberg, albeit an obvious one. As he described it, the Oculus Rift headset is "really a new communication platform." A few examples Zuckerberg used were "virtually" attending sporting events, visiting with a doctor, or studying most anywhere in the world from the comfort of your couch by donning a Rift headset.
Additional industries including construction, engineering and the medical research field are just a few other possibilities that would seem a natural fit for a virtual reality solution like Rift. Should the estimates come to pass, Microsoft's HoloLens solution seems poised to win its share of the $120 billion piece of the AR pie. Which is just fine.
Facebook should be content – as should investors – owning what many consider the leading virtual reality headset around, and along with its ad targeting capabilities, it could grab an awfully big piece of the remaining $30 billion in estimated revenues over the next five years. If it does, and Facebook certainly seems poised to do so, it won't be long before overlooking Oculus becomes a thing of the past.
Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends Facebook. The Motley Fool owns shares of Facebook and Microsoft. Try any of our Foolish newsletter services free for 30 days. 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.