Virtual Reality Comes into Focus
Virtual reality (VR) is on its way to becoming an important new computing platform. While still in its early stages, VR is expected to start gaining real traction this year. VR represents an entirely new tech ecosystem. Using a VR headset, it’s an immersive experience for users providing “presence” in a virtual world. TV shows usually broadcast at 30 frames per second (fps), while moving images in VR are at 90 to 120 fps, creating a very lifelike 3D experience.
There is huge market potential when it comes to supplying the semiconductors, infrastructure and equipment to support VR in both the consumer and business segments.
Gaming, media and entertainment are the obvious initial use cases for the computer-simulated reality. Virtual travel promises to be big, as users could explore different cities and regions with the click of a button. There are opportunities to expand online educational courses, enabling students to feel that they’re almost part of the subject being taught. In healthcare, VR can be put to work treating anxiety disorders and phobias, such as fear of flying and public speaking.
Over the next few years, the total VR market for hardware (including headgear displays), software content (paid downloads, subscriptions and in-app purchases) and advertising is expected to quickly ramp up. Deutsche Bank estimates VR in 2020 will represent a $7-billion addressable market, including $4 billion in advertising alone.
At the end of March, the Oculus Rift VR offering from Facebook (FB) hits the market. Priced at $599, the VR platform from the social-networking giant includes the Rift headset (with built-in headphones and microphone), the Oculus Remote, a sensor, an Xbox One controller and two games. The Oculus Touch handheld motion controllers are expected to ship in the second half of this year.
Semiconductor maker NVIDIA (NVDA) is the provider of graphics processors for Oculus Rift, as well as for HTC’s Vive VR headset. The company has identified more than 600 organizations that are already working on some type of VR product. NVIDIA’s GeForce GTX processor offers a rich and highly immersive VR experience thanks to its fast performance. Importantly, NVIDIA’s graphics processors power the 360-degree video used in VR. The company’s CUDA programming model is used to rapidly stitch together video from multiple cameras into a single 360-degree panorama.
NVIDIA’s VRWorks suite of programming tools is aimed directly at VR developers. With VRWorks, developers can achieve high performance, low latency and plug-and-play compatibility when building their VR apps and devices.
Since VR requires seven times the graphics processor performance of typical PC games and latency of less than 20 milliseconds (to eliminate image choppiness and deliver a seamless visual presentation), it’s critical that developers use the best tools to optimize the experience right from the start. NVIDIA’s Multi-res Shading technology is a rendering technique for VR in which each part of an image is rendered at a resolution that better matches the final image that a user sees on the headset. With Multi-res Shading, developers are achieving performance gains of as much as 50%.
The fiscal 2017 (ending January) consensus revenue estimate for NVIDIA of $5.3 billion represents growth of just over 6%. The company today generates more than half of its total revenue from graphics processors for PC gaming. Since gaming is the #1 VR use case out of the gate, it only makes sense that the company would have a major presence in the new ecosystem. NVIDIA’s other major growth driver is the automotive sector, providing graphics processors for car infotainment systems. There are 10 million cars on the road today equipped with digital dashboards powered by NVIDIA. Based on the company’s design wins, there are 25 million cars in the pipeline.
Recently trading around $33.80, NVIDIA shares have rebounded 36% from a low of $24.75 reached in the middle of February. The stock last week hit a 52-week high of $34.25. On the FY’17 consensus EPS estimate of $1.44, the forward P/E stands at 23.5, down from a peak P/E of 25.1 in December. Given the sharp rally over the past several weeks, the stock would be more attractive on a pullback into the upper $20s.
Intel (INTC) is another important infrastructure player in the VR world. The chipmaker’s RealSense 3D platform is made up of three cameras—a 1080p HD camera, an infrared camera and an infrared laser projector— that operate as one. Powered by Intel processors, the RealSense eye-tracking technology can “see” just like a human eye when it comes to sensing depth and tracking human motion. With RealSense, VR users are able to create realistic gaming avatars (developed from face scans) and control games with hand gestures.
Intel is putting RealSense to work to improve the overall mobile VR experience, partnering with IonVR to create a headset (connected to a smartphone) with MotionSync technology that nearly does away with motion blur. One of the big barriers to VR had been motion sickness. In the past, panoramic images in VR headsets didn’t move fast enough for the human eye, which caused users to get nauseous. With MotionSync and a RealSense ZR300 camera leveraging stereoscopic depth-sensing technology and a wide-angle feature-tracking lens, mobile VR users experience real-world objects in 3D without any image lag.
In March, Intel acquired Replay Technologies, a provider of proprietary 3D video technology that has been used by broadcasters to produce seamless 360-degree replays at sporting events. Using Intel-based servers and 28 high-definition cameras positioned around the arena, the two companies previously collaborated to produce panoramic replays and highlight reels during the NBA All-Star Weekend. Intel intends to apply Replay’s technology across various VR use cases.
Given Intel’s massive size, the chipmaker’s VR unit is a very small part of the overall business. But Intel also expects to benefit indirectly from VR, as increased demand for the new computing platform should drive more consumers to upgrade their PCs (powered by the company’s chips). It’s estimated that less than 10% of PCs worldwide right now are capable of working with Oculus Rift or HTC Vive.
Editor’s Note: At present we do hold any of these stocks in the STI portfolios, but will continue to track it closely and may issue one or more buy recommendations in this sector later this year.