is on an acquisition spree. The social network company recently
announced the acquisition of Oculus VR for $2.0 billion, just a
month after it bought WhatsApp for a whopping $19.0 billion.
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The purchase price includes $400.0 million in cash and 23.1
million shares of
. It also includes $300.0 million as earn-out in cash and stock
based on the achievement of certain milestones. The acquisition
is expected to close in the second quarter of fiscal 2014.
Oculus develops virtual reality headset, the Oculus Rift, and
provides software development kit for building applications for
which it has already received more than 75K orders. Although the
technology is currently limited to gaming, Facebook plans to
extend it to new industries such as communications, media and
entertainment and education.
Facebook's surprising move into the emerging virtual reality
market is projected to bear fruit over the next 5 to 10 years,
which is a bold step in our view. If Oculus technology succeeds
in gaining mass adoption, it will help Facebook dominate the
virtual reality market, going forward.
Facebook will enjoy a first mover's advantage much similar to
enjoyed in the smartphone market during 2007-2012. Moreover, the
company's strategy of acquiring next-generation technology
strengthens its software developer talent base. This is
significant as Facebook expects to focus on delivering Oculus
technology as software and services rather than hardware.
However, Facebook's frantic pace of acquisitions and their
long-term growth nature are major concerns for investors. Per
Bloomberg, to-date the decade-old company has spent approximately
$21.0 billion on 40 acquisitions. At the end of 2013, Facebook
had cash and cash equivalents of $11.4 billion.
In order to calm investors' nerves, we believe Facebook needs to
maintain its ad revenue growth momentum, particularly in the
mobile segment over the next couple of years. However, this may
become difficult as the company continues to face intensifying
in the ad market.
Moreover, Facebook will face competition from Sony's Project
Morpheus in the virtual reality market over the long term. Oculus
rift is also expected to face severe competition from wearable
devices developed by Google, Apple, Samsung and Intel.
Nevertheless, Facebook's growing mobile user base (more than 1
billion), Instagram's increasing popularity (200 million users)
and the new initiatives such as Internet.org will continue to
boost Facebook's share price in the near term.
Currently, Facebook has a Zacks Rank #2 (Buy).