In the domain of headsets, Facebook maybe slipping behind the competition. Sales by HTC Corporation and Sony, whose headsets are powered by smartphones, have far outsold heavier-duty devices such as the Oculus Rift. In addition, Facebook and Oculus have grappled with internal problems recently, resulting in the departure last March of Oculus founder Palmer Luckey.
For the next six weeks, Facebook's Oculus VR unit will charge $399 for the Rift, Touch motion controllers and some games. Previously, Oculus sold that bundle for $598, itself a $200 discount from their combined launch prices. For comparison, Sonys (SNE) PlayStation VR is priced around $400 and the HTC Vive is priced at $700. Facebook hopes to gain market share in lowering its price point. However analysts say Facebook continues to trail its rivals by a wide margin. Research firm IDC estimates the Oculus device has sold about 520,000 units world-wide to date, compared with 770,000 of HTC's Vive headsets and 1.6 million PlayStation VR headsets.
Facebook said it has provided more than $250 million in funding to developers to drive more content for the Rift. The social-media company said it plans to dole out $250 million more over an undisclosed period. The concern that we have with Facebooks investment in Oculus is that the technology is still in its infancy. Much like the VHS movie cameras in the 1980s, which cost several thousand dollars. Today the same technology is available in a hand-held camcorder for less than $100. When considering the total cost for a consumer to get equipped for the virtual reality experience, we note that this technology remains inaccessible to the general public, especially the 16-25 years old population, who represent the highest demand. Indeed, one of the principle problems with virtual reality today for the consumer is the price of accessories. Wearables, PlayStation console, 3D glasses, touch controllers, and wireless adapters can easily double the initial purchase price of the headset.
With Facebook cutting the price of its Oculus Rift and (for the moment) not gaining market share, we are doubtful that the large investment in Oculus will payoff for Facebook this fiscal year. The share price of Facebook has hardly wavered however. Up +33% year-to-date, the stock price has held near record highs over the past few weeks.
Valuations remain rich, with Facebook trading at an estimated P/E of 31.6x in 2017 (although the 2018 P/E is expected to fall to 25.5x based on estimated earnings). Analysts nevertheless continue to upwardly revise Facebook and fundamentals remain very solid for the company, according to 4-Traders fundamental analysis.
The 4-Traders ratings chart below shows that, despite a P/E in the bottom decile (more unattractive), Profitability, Earnings Quality, and Revenue Growth all remain near the top of the class.
While the Oculus Rift investment seems unlikely to pay-off this fiscal year, Facebooks overall business model continues to generate strong fundamentals. While we are not adding to Facebook positions today, company shares remain a strong buy going forward on any form of price weakness.