Mark Zuckerberg Thinks You’ll Be Buying an Oculus Soon

The Facebook chief believes virtual reality is on the cusp of going mainstream. Here's what it means for investors.

Nearly all of Facebook‘s revenue comes from one source: Advertising.

The company is synonymous with social media, and its platforms (Facebook, Instagram, WhatsApp) have billions of users around the world, underpinning its high-margin business model.

While Facebook’s advertising business has made it one of the most profitable and valuable businesses in the world, in the future CEO Mark Zuckerberg sees Facebook evolving into a different company. On Facebook’s fourth-quarter earnings call, Zuckerberg shared his vision for  the near future, saying:

“Finally, let’s discuss our work building the next computing platform. This is one of the areas that I’m
most excited about our progress heading into 2021. If you look at the history of computing, every 15
years or so a new major platform emerges that integrates technology more naturally and ubiquitously into our lives — starting with mainframes, then PCs, then browser-based computing, and then mobile. I believe that the next logical step here is an immersive computing platform that just delivers this magical sense of presence — that you’re really there with another person or in another place.”

The next major platform Zuckerberg is referring to is virtual/augmented reality (VR) and the Oculus platform within Facebook, also known as Facebook Reality Labs. According to that timeline, which is accurate in showing the progress of past computing advances, the emergence of virtual reality could be just around the corner. After all, Apple’s iPhone, which heralded the mobile era, launched in 2007, or 14 years ago.

If Zuckerberg is correct, the VR era should be starting as soon as next year. The inevitability of VR, as Zuckerberg sees it, is one reason why the Facebook chief believes his company and Apple are on a collision course in hardware.

Inside Facebook Reality Labs

Facebook Reality Labs is the division of the social media giant devoted to virtual and augmented reality experiences. In its five reality labs around the world, Facebook engineers are developing technology and experiences, envisioning a world where a “lightweight, stylish pair of glasses” would replace a device like a computer or smartphone, eliminating a layer in human-computer interaction and a barrier to communicating with other people, allowing you to feel physically present even when you aren’t.

The applications of such a technology are vast, including job training, education, gaming, exercise, a work meeting, or just sharing an experience with friends.

Facebook is the market share leader in virtual reality headsets, with 35% share last year according to TrendForce, and that was before the company launched the Oculus Quest 2 last October, which Zuckerberg said is “on track to be the first mainstream virtual reality headset,” and noted that it was a popular holiday gift. The headset has received generally strong reviews, rating an average of 4.7 out of five stars from more than 8,000 reviewers on Google.

What it means for investors

When it comes to sizing up the tech stock , Oculus and Facebook’s other investments in VR and AR (augmented reality) seem to be almost completely ignored, as Facebook’s social media properties and advertising business greatly overshadow them.

In many ways, that makes sense. After all, advertising made up 98% of Facebook’s total revenue last year, but its other revenue segment, which is made up mostly of hardware products like Oculus and the Facebook Portal, is growing quickly. Revenue in the category jumped 72% to $1.8 billion last year, and demonstrating the popularity of the Quest 2, other revenue surged 156% to $885 million in the fourth quarter, the quarter it was released.

What’s more important than the current results from its VR segment is the potential for the platform. If Zuckerberg is right that VR/AR represents the next major computing platform, then Facebook investors are sitting on a virtual gold mine here. The valuation of Facebook Reality Labs isn’t reflected in Facebook’s market value, which is already cheap according to most metrics. Facebook just capped off a year with 22% revenue growth to $86 billion and earnings per share jumping 57% to $10.09, yet the stock trades at a discount to the S&P 500, valued at a price-to-earnings ratio of less than 30.

It’s too early to tell what will become of Oculus and Facebook Reality Labs, but the pandemic has shifted perceptions about such tools, and elevated videoconferencing software like Zoom to utility status. Zuckerberg himself seems to think the platform has the potential to be the next iPhone, and it’s clearly a passion project for him, as he told investors: “This is going to unlock the types of social experiences I’ve dreamed about building since I was a kid.”

He may not be right about VR being on the eve of a breakthrough, but given his track record, it would be a mistake to bet against him.