The ever-growing use of virtual reality (VR) technologies has expanded the potential for companies across several industries. Companies previously limited to a specific niche can now expand into new business lines thanks to the developments being made.
While VR will likely foster growth in numerous tech stocks, investors looking to benefit from the VR trend could find lucrative opportunities in Facebook (NASDAQ: FB), Qualcomm (NASDAQ: QCOM), and Unity Software (NYSE: U). Let's find out a bit more about what makes these great virtual reality stocks in June.
About 44% of the world's population uses some app on the Facebook platform every month. This calls into question where the company can find future growth. Facebook management hopes virtual reality will provide part of the answer. Facebook bought Oculus in 2014 and began investing in its potential, but it is only now emerging as the company's fastest growth driver.
In the first-quarter 2021earnings call CEO Mark Zuckerberg described VR as an "important part" of how the general public will interact with computers in the future. He also mentioned that the Oculus Quest 2 headset has exceeded expectations following the holiday season. Moreover, he added that the most used augmented reality (AR) apps are focused on social, validating the company's theory that the Facebook site's synergies with Oculus will drive growth in this niche.
For the first quarter of 2021, Facebook's "other revenue" business segment, which primarily refers to Oculus, saw revenue surge 146% year over year to $732 million. This makes up only a tiny fraction of the $26.2 billion in quarterly revenue. Still, it represents a significant improvement from the 72% growth rate in 2020 and the 26% increase for this segment in 2019.
Like its revenue, Facebook's stock price continues to climb -- it rose by 48% over the last 12 months. Quarterly net income of $9.5 billion increased 94% as the growth in operating expenses lagged the revenue increase. This allowed Facebook's price-to-earnings (P/E) ratio to fall slightly over the last year to 28. Considering the growth in Oculus and the overall gains, Facebook looks like a relatively low-cost option for investing in VR.
Investors know Qualcomm primarily for smartphone chipsets. However, the company has also developed a chip for what it calls Extended Reality (XR), which incorporates mixed reality (MR) with VR and AR into the SnapDragon XR2 platform. It partners with companies such as Verizon and iQiyi, and its SnapDragon XR2 appears in Facebook's Oculus Quest 2 goggles. This key alliance provides a competitive advantage to both companies as it drives both Qualcomm's presence in the VR space and Facebook's massive growth in this segment.
Qualcomm does not break down revenue specifically for its XR chips. However, Qualcomm Technology Licensing (QTL), the division that markets that chip, grew its revenue by 52% year over year in the latest quarter, making up about $1.6 billion of the company's $7.9 billion in quarterly revenue. This came in roughly in proportion to overall revenue growth.
Thanks to 5G upgrades, Qualcomm also increased its revenue by 67% during the first two quarters of the current fiscal year compared with the first six months of fiscal 2020. This allowed net income to grow by 203% over that period due to much smaller increases in operating expenses.
Although Qualcomm's stock price surged by just over 65% over the last 12 months, profit increases have kept the valuation in check. Qualcomm stock now sells for about 19 times earnings, a 20% reduction from year-ago levels. While 5G should continue to perpetuate profit increases, its virtual reality offerings could enhance that impressive growth.
3. Unity Software
Many consumers may not know Unity Software. However, it provides a real-time development platform for gaming on the Windows, macOS, and Linux platforms.
Now, the company has created a set of development tools geared toward virtual reality. In the Q1 2021 earnings call, CEO John Riccitiello described the transition from linear 2D to real-time 3D as a "transformative theme" that will change how creators recreate and tell their stories. Virtual reality will likely become a critical component in this transformation. Its software, initially geared for gaming, has now developed applications for industries as diverse as real estate, healthcare, and energy.
Unity also remains popular with developers. When Loup Ventures surveyed Unity developers in 2020, it found that 96% of developers will either maintain or increase their subscriptions to Unity. Roughly 63% also cited ease of use as their main reason for loyalty to the platform.
This loyalty likely played a factor in the 41% year-over-year revenue increase in the latest quarter to $235 million. However, with a near doubling of research and development expenses, its quarterly loss rose to $108 million.
Still, its proportion of customers who spend over $100,000 grew by 25%. With full-year 2021 revenue expected to rise by approximately 30% from 2020 levels, the increases also appear poised to continue.
Despite a massive correction, the stock price has still risen by nearly 40% over the last 12 months. It pulled back as the price-to-sales (P/S) ratio moved north of 50, and revenue growth fell short of expectations. Still, with the P/S ratio now at 26 and a growing base of applications, investors might begin to consider Unity stock a buy.
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Will Healy has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Facebook, Qualcomm, and Unity Software Inc. The Motley Fool recommends Verizon Communications and iQiyi. The Motley Fool has a disclosure policy.
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