The concept of virtual reality (VR) has been exhibited in sci-fi movies for years. VR presents a virtual representation of reality through sensors, software programs, and cameras. The concept saw its first real-world application in games in 2016 in the form of wired VR headsets connected to PCs and mobile phones. At that time, many tech companies hailed VR as  future of technology. Facebook (FB) CEO Mark Zuckerberg even went so far as to predict that VR could emerge as the next revolutionary computing platform.

The reality, however, is that the uptake of VR has been slow. Most agree that  for any technology to gain significant traction it should meet four criteria: affordability, availability, application, and ease of use. In the case of VR, the technology adoption has been slow largely because of a lack of VR-supporting content and comfortable VR headsets.

But as fate would have it, the  COVID-19 pandemic, which has necessitated much more remote communication worldwide, has ushered in a turning point for the increased the adoption of VR and augmented reality (AR) in commercial uses, such as training, industrial maintenance, and retail showcasing. International Data Corporation (IDC) forecasts worldwide spending on AR/VR will surge at a CAGR of 54% in the 2020-2024 period.

While VR’s growth potential is attractive, it is still at an early stage, lacking clarity on how the market will evolve. But we believe two major factors that will drive VR adoption in 2021 are VR content and VR headsets. One way to tap the VR growth potential while minimizing the risk is to buy into tech giants that are ahead in the VR game and have diversified portfolios.

Three tech giants that lead in these factors are Alphabet (GOOGL), Facebook (FB), and Sony Corporation (SNE). The three stocks need no introduction because they are content and hardware leaders. Although VR is currently a small portion of their portfolios, we believe they are positioned to gain when the technology gathers momentum. Here’s how.

Alphabet (GOOGL)

GOOGL is well known for its domination of  search engine and  digital advertising, its mobile operating system Android, and other digital products. GOOGL is also trying its hand at  hardware with the Pixel smartphone. The company has even tried its hands-on mobile VR experiences with the Google Daydream VR headset. But the slow pace of technology adoption has put this product on the back burner.

GOOGL is in a powerful content position, with the world’s biggest online-video streaming platform YouTube. VR is a small component of GOOGL’s overall business strategy. Hence, even if VR does not gather momentum in the next two to three years, GOOGL will not be affected. But if VR space booms , GOOGL would be a key beneficiary by virtue of  the VR video streaming (YouTube) and VR game streaming space (Google Stadia).

GOOGL is also executing moonshot projects such as  self-driving cars, where VR can play a key role in training. Even absent a big leap in revenue derived from VR, GOOGL will  continue to earn from advertising, cloud, and Android. Analysts expect GOOGL’s revenue to surge by 21% in 2021.

How does GOOGL stack up for the POWR Ratings?

A for Trade Grade

A for Buy & Hold Grade

A for Industry Rank

B for Peer Grade

A for overall POWR Rating

You cannot ask for better. The stock is also ranked #2 stock in the 61-stock Internet industry.

Facebook (FB)

FB is also a content king, but  in the social media segment. With WhatsApp, Instagram, and Facebook, FB  is a near-monopoly in social networking, messaging, and user data. FB earns almost all its revenue from digital advertising. But it is looking to expand its revenue streams and is testing e-commerce, VR, gaming, and other avenues.

FB’s CEO Mark Zuckerberg has been bullish on VR since 2014. FB  acquired VR-company Oculus for around $3 billion in 2014 and it launched its first Oculus Rift VR headset in 2016. It has upgraded the device over the years. In 2019, FB launched an updated, non-tethered, headset Oculus Quest, which helped Oculus gain a 28.3% share in all VR headsets shipped that year. And just last year, it launched Oculus Quest 2 for $299.

FB plans to spend more than $3 billion on developing new VR applications over the next 10 years. It has acquired Asgard’s Wrath developer Sanzaru Games, Lone Echo developer Ready at Dawn Studios, and Beat Saber’s developer Beat Games to develop new VR games and experiences internally. FB has also created Reality Labs to develop a VR content ecosystem and it is testing Infinite Office VR experience to help companies conduct meetings, collaborate on projects, and more.

If VR gains momentum, FB’s efforts could pay big.  But until then, FB will  continue to earn from digital advertising. Analysts expect FB’s revenue to surge by 24% in 2021.

FB is rated “Buy” in our POWR Rating system. It also has an “A” for Industry Rank, and a “B” for Trade Grade and Buy & Hold Grade. In the Internet industry, it is ranked #16.

Sony Corporation (SNE)

While GOOGL and FB are content leaders, Japan’s SNE is a leader in consumer electronics. SNE is a leading player in entertainment, offering music players, speakers, and televisions and entertainment content like movies and music. But most of all, SNE is a leader in the game console space with PlayStation. Gaming represents the biggest use case for VR at this juncture.

SNE launched PlayStation VR in 2016, and it has been aggressively pursuing other VR opportunities. While FB’s Oculus Rift has the largest share in VR headsets, they are mostly PC focused. SNE’s VR device beats Oculus Rift in performance. Even though its PS4 user base is much smaller  than the PC and mobile user base, SNE’s VR device has higher sales volume. SNE’s VR device is a leader in non-phone VR headsets because of its VR-ready games.

SNE is far  ahead in the VR game space  and is already starting to reap the benefits of having sold more than five million PS VR headsets since its launch in 2016. As VR gains momentum, we think SNE will have the technology to make the most of the demand . Until then, SNE will continue to earn from game consoles, movies, and other entertainment devices. Analysts expect SNE’s revenue to surge by 12% in 2021.

Hence, SNE is rated a “Strong Buy” in the POWR Ratings. It holds straight “A” for Trade Grade, Peer Grade and Buy & Hold Grade, and a “B” for Industry Rank. It is also the #1 ranked stock in the 21-stock Entertainment – Media Producers industry.

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GOOGL shares were trading at $1,746.46 per share on Monday morning, down $6.18 (-0.35%). Year-to-date, GOOGL has declined -0.35%, versus a -0.11% rise in the benchmark S&P 500 index during the same period.

About the Author: Puja Tayal

Puja is a seasoned writer working with financial publishing companies like Motley Fool Canada and Market Realist. With over 13 years of experience in the field of fundamental research, she brings a blend of comprehensive, well-researched insights into her articles. More...

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