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From Digital To Virtual Reality
Modern life is increasingly spent behind screens. And the pandemic, with the rise of working from home, only accelerated this trend. But our ways of interacting with the digital world/reality are becoming rather old. We still use a mouse and keyboard like with some of the first personal computers a generation ago. Or a touch screen limiting our input to one character at a time.
Similarly, displays are still based on screens. They have a higher definition, flatter, and overall better, but this is just an incremental improvement over the bulky, TV-like screens of the first PC.
This is why the idea of true virtual reality (VR) is so appealing. By totally immersing us in a virtual world, it radically changes the experience and how we interact with it. In parallel, the idea of augmented reality (AR) is bringing digital enhancement to the real world, blending and merging the two seamlessly.
This transition is still in its early stages. The first high-quality virtual reality headsets are just a few years old, and augmented reality is only starting to come into our lives. This is because a few milestones needed to be achieved first:
- Virtual worlds that are visually appealing and realistic enough to be both pleasant and useful. This is something the video game industry has only started to achieve recently.
- Good enough displays that could project images at a definition high enough to feel like reality.
- Strong enough processing power to react in real-time to the user’s actions and movements.
- Cheap enough chips and semiconductors to make it affordable and light enough to make it wearable.
Now that all these preconditions are met, the AR/VR industry is ready to start. And it might be as transformative for society as the personal computer or the smartphone has been in their own era.
Top 10 Augmented Reality (AR) and Virtual Reality (VR) Stocks
1. Apple Inc.
Apple is a company that went through multiple metamorphoses. It was single-handedly responsible for some of the major innovations in the PC industry under the visionary leadership of Steve Jobs. And then ushered in a new era of digital mobility with the iPod, iPhone, and iPad. Today, the business mostly relies on smartphone sales and the associated power of the app store ecosystem.
The problem is that the smartphone market is starting to mature by now, which could spell the company's end of growth. This is why Apple is now focusing on virtual reality.
In 2023, Apple announced its new product, the Vision Pro, a VR headset for a steep price of $3,499. The idea behind the Vision Pro is to create an entirely new market like the iPhone did for the smartphone. With a high initial price, it also can afford top-of-the-line performances to make it relevant for consumers who are most likely to use this new product. At this price, it is likely only to attract professionals using the Vision at work or avid tech enthusiasts.
The question for investors is to determine if the maturing of the virtual reality market could follow one of the smartphones, with first premium pricing and then progressive democratization, while also creating for Apple a durable image as a premium brand in the segment.
The question will be one of what the market for VR is. Is it something utilitarian, for work and practical usages, a lifestyle brand, or more of an entertainment system? Depending on the answer, the winner among big tech companies of the incoming VR wars will likely be the one to get it right, with Apple firmly positioning itself in the premium branding and professional position. And potentially the company's future depending on the success of this strategy.
The tech industry has been shaped by the Apple vs Microsoft rivalry for a long time. This had somewhat died out with Apple becoming the iPhone company and Microsoft instead focusing on gaming (XBOX) and enterprise services (cloud, Office 365, Team, LinkedIn, etc.).
But maybe the VR tech era will see the two rivals come to blows again. Microsoft is active in the segment through its Hololens.
Already on its second iteration, the Hololens 2 is clearly positioned as a work tool first and foremost. Or as Microsoft itself said: “For precise, efficient hands-free work. An ergonomic, untethered self-contained holographic device with enterprise-ready applications to increase user accuracy and output”.
And while people are still talking about the potential applications of the Apple Vision Pro, the Hololens is creating a solid niche market for itself. Most notably, Microsoft sold 120,000 units to the US military in a $21.9B deal. Since the deal has been slow to materialize fully, new updated versions of the device, lighter and more combat-ready, are getting tested. So, maybe the first application of VR is not video games or virtual office, but taking the first step in creating full cyber warriors, which would be at home in a science-fiction novel.
In total, Microsoft sold a total of 300,000 Hololenses at the end of 2022. While remarkable for a device selling for several thousands of dollars, it might indicate that Microsoft has been a little too early and serious in its VR approach, especially when compared to sales numbers for more “gaming-focused” V headsets (see below).
Maybe more worrying for investors, this is also somewhat the story of Microsoft and the smartphones and tablets, with Apple able to kick them out of the market they had entered first.
At the same time, Microsoft's “failure” on smartphones did not stop it from reaching a market capitalization above $2.6T. So maybe Microsoft is a VR stock for investors not willing to bet the house on the future of VR but simply seeing the technology as one among many potential sources of growth and profit for the tech giant.
A key factor for VR’s eventual success is smooth and pleasant visuals. Especially because what little imperfections can be tolerated on a screen will quickly induce nausea and discomfort on a VR system.
So, a big winner of VR’s widespread adoption should be NVIDIA, which built its business on its graphic cards’ outstanding capacities.
NVIDIA offers a full toolkit to developers and IT professionals looking to work with VR, becoming de facto one of the companies setting up the technical standards of the sector.
A pioneer of 3D gaming, NVIDIA is also at the forefront of VR gaming, with its graphic cards a keystone element, together with the rest of the PC components and the VR headsets. Because VR often requires the simultaneous computation of several images at different angles, strong graphic processing power is necessary.
As a result, NVIDIA will likely benefit from VR adoption, no matter which headset model or type of application becomes the norm. The company’s semiconductor products are also widely used for crypto mining and AI calculation, so it its stock price is likely to be affected by these industries as well.
As such, NVIDIA stock is one to capitalize on the continuous growth of the tech industry in new segments, especially AI, gaming, and VR. Investors will, however, need to be cautious, as the company’s great achievements have also led to a very pricey valuation compared to current earnings, pushing the market cap above the one trillion dollar threshold.
Meta, formerly Facebook, incorporates Instagram and the newly launched Twitter competitor, Threads. The social media company’s re-branding into Meta was a calculated move to push for the turn toward the so-called “Metaverse.” The idea is to have a parallel world where we would spend much of our time, including social interactions, work and entertainment.
To support this ambition, Meta has been very active early on in the VR sector, with the 2014 acquisition of Oculus, one of the earliest VR headset companies. In 2022, Meta had sold 17 million units of its Quest 2 VR headsets since launch (selling from $299.99), and the company just launched a high-end Meta Quest Pro priced at $1,500. A new Quest 3 for $499.99 is expected by the fall 2023.
Meta VR products have so far been carried by the novelty effect and a good selection of VR games, often played as “party games” between friends.
The social aspect and overall adoption of the metaverse have been less successful, with widespread skepticism over the lower graphic quality and questions on people’s willingness further to centralize all their online life into Meta’s hand. This led Meta to downscale its metaverse ambitions, with a redirection toward AI and its potential to improve Meta’s core business of advertising.
Ignoring this setback, Meta is still responsible for putting VR headsets on more people’s heads than almost any other company. The price point of its headset is also rather affordable, making it more likely to be adopted massively.
So maybe the metaverse is a stillborn idea, at least for now. But Meta’s position in VR as a whole is far from over. With more and more games launched in VR or designed around it, it might be a winning proposition for Meta, turning the social media and advertising giant into a gaming company.
(You can also read more about the potential of VR gaming in our article “Investing in the Future of VR: How Immersive Virtual Experiences are the Next Wave of Gaming.”)
Qualcomm is one of the major telecommunication device companies involved with a large part of the world’s network in optic fibers, broadband connections, mobile antennas, data centers, and overall digital infrastructure.
The company is also active in the VR/AR segment. In 2018, it released a VR standard for headset chips that was widely adopted by the industry, with the frequently updated Snapdragon platform.
Today, Qualcomm’s focus is to make VR truly mobile through a combination of advanced chips and 5G connectivity, both domains where it excels. This mobility and connection focus is also what is required to offer truly useful Augmented Reality (AR) systems, like smart glasses offering a digital overlay over our view of the real world.
VR/AR is for Qualcomm, just part of a puzzle of total connectivity, driven by 5G and even later 6G. The company is also a key player in the industry as a supplier of components and in setting industry standards. So, it sees the turn toward cloud gaming as the other side of the VR coin and AR as the first “killer app” of 5G connectivity.
As a well-established company, having gone through and survived the dot.com bubble and crash and then thrived further, Qualcomm is a company for investors interested in the backbone of the digital economy and able to grasp the details of the telecom market beyond the more visible and “popular” part of the tech industry.
Using its strong position in the console market with the PlayStation System 5 iterations, Sony has also achieved success in the VR market. By 2019, it had become the world’s best seller of VR systems.
But overall, Sony’s gaming systems still rely on classical gaming more than VR. This was expected to change with the release in early 2023 of the PSVR 2 system. Early data indicates that PSVR 2 has sold well, with 600,000 units sold in the first 6 weeks after release.
Sony seems determined to turn VR from a curiosity to a mainstream gaming offer, with 30+ games early on, including leading titles and licenses like Resident Evil, Gran Turismo, No Man's Sky, Star Wars, etc.
Sony as a group is much wider than the PlayStation, which is itself wider than VR. Gaming and associated services represent the largest part of the group’s revenues while only being 27% of total sales.
So investors in this company should also be aware of these other activities and how they could impact the stock prices.
This does not change the fact that if VR truly becomes the future of gaming, Sony’s dominant position in the console market and established users for the PSVR 2 will place it in a pole position to capture large segments of the gaming VR market.
Autodesk is the creator and provider of many professional 3D software programs, of which the most famous is probably AutoCAD. They are used worldwide by professionals like engineers and architects for designing industrial components, buildings, and 3D models.
Because they are often the standard practice for their industries, these softwares have a very strong economic moat, where entire professions depend on them daily and for which proficient skills at using them fully can be a career-making advantage.
Autodesk is very active in staying on top of its industries’ innovations, among which is the concept of “extended reality.” This concept includes and merges together AR, VR, and “mixed reality,” treating them all in a continuum of blended digital and real experiences. These can be used to design new things, share ideas and 3D models with colleagues, and include real-time collaboration on shared virtual items.
Safely protected by its firm grasp over the industries in which it operates, Autodesk is able to leverage partnerships with almost all the key actors of VR/AR technology development, including Unity, Unreal Engine, and NVIDIA.
The strong argument for VR/AR adoption by Autodesk customers is that they are already full-time, experienced users of 3D modeling. So, there is very little need to convince them of the pertinence of better visualization tools for their work. They also work in industries where quality is crucial and budgets large, making integrating VR/AR a trivial matter if it can increase productivity and/or quality.
So, while not a pure VR player, Autodesk is a good bet on the technology becoming prevalent among some professions, and Autodesk is able to capture a large part of the added value it created.
The most visible part of AR/VR is the hardware. But the software part will be equally important for it to become a thriving economic sector.
And when it comes to 3D and virtual rendering, few players are as important as Unity 3D. The company is mostly active in the video game market, where most major developers rely on its system (or one of the few competitors like the privately held Unreal Engine) to create their games, from 3D assets to script to full environment. They can then convert them to be “ported” to any platform like multiple consoles, PCs, mobiles, etc…
It is also a platform for smaller developers, where they can buy relatively cheaply premade virtual assets to use in their projects.
Unity aims to become the one-stop shop for all virtual artists, no matter what project they are working on. The expansion beyond video games to all partial digital media was perfectly illustrated by the acquisition of Weta Workshop, famous for doing the VFX of the Lord of the Rings trilogy, for $1.6B. The company has also expanded its monetization capacities by acquiring IronSource, a videogame monetization tool and platform, for $4.4B.
Unity is especially active in VR, with the release of its Toolkit 2.3, allowing for integrated eyes and hand tracking. The tool allows for device simulators to be used for enterprise training on tools, such as manufacturing or healthcare.
This makes Unity a good candidate to benefit from the increasing demand for VFX, AI-generated content, and VR training and be a neutral party for developers and 3D artists to specialize in and later port their creation to multiple platforms, no matter what hardware wins the virtual reality war.
When new types of video games and potential Metaverses are planned for the future, some companies are already actively using virtual reality on a daily basis for critical needs.
One such company is NuVasive. The company specializes in spine surgery and owns several VR training solutions for surgeons, some developed by Nuvasive, some acquired by its merger with surgery robotics and equipment firm Globus Medical.
This is not a pure VR/AR play, but a leader in spine and hip surgery with already a solid adoption of VR training among its surgeons. So investors wary of nebulous plans for turning VR/AR mainstream and profitable might prefer instead a solid and straightforward use case in a niche market, where virtual training increases the safety of surgeries at no risk to the patient.
(we covered NuVasive and other AR/VR companies in healthcare in our article “5 Best AR and VR Healthcare Stocks.”)
Kopin is a leader in wearable computing hardware, specializing in ultra-small displays and low-power ASICs. So far, its main markets have been components for smartphone screens and military vision systems, including night vision devices and the F35 head-mounted displays.
The military requirements of low power usage, lightweight, durability, and high-quality micro-displays match the requirements needed to make AR smart glasses a reality. So, it is unsurprising that Kopin was instrumental in the conception of the Google Glass Enterprise Edition 2.
Kopin has also contributed to hands-free voice-controlled systems for industrial workers and 3M™ Scott™ Sight In-Mask Thermal Imager for similar reasons.
Kopin revenues have so far been driven by the defense segment, for 60% of total revenues. Nevertheless, Kopin’s unique experience in creating high-quality AR glassware will likely make it a prime supplier to any big tech company looking to launch an AR smart glass system. As a bonus, Kopin will also likely benefit from additional spending to modernize military equipment in the context of rising tensions with rival powers like China and Russia.