Tag: Motley Fool

Shares in Aussie Broadband Ltd (ASX:ABB) have performed strongly since the company first listed on the ASX last October. In that time, shares in the telco have risen almost 50% to $2.83 (as at the time of writing), and even briefly touched a high of $3.30 in mid-April.

Let’s take a closer look at some of the drivers behind these big gains, and also see what the future might hold for this up-and-coming ASX telecommunications company.

Company Background

Aussie Broadband sells nbn^TM plans to individuals and businesses. The nbn^TM is Australia’s wholesale broadband network, maintained and operated by NBN Co, a Government Business Enterprise wholly owned by the Australian Federal Government.

Aussie Broadband has been in operation for over 16 years but it is still dedicated to its local roots. Rather than offshoring its call centre operations, Aussie Broadband has set up its call centres in regional and metropolitan Victoria. It also actively supports local community initiatives through sponsorships and other volunteer programs.

All in all, Aussie Broadband seeks to position itself as a grass-roots local alternative to the bigger established telcos like Telstra Corporation Ltd (ASX:TLS) and Optus (owned by Singapore Telecommunications Limited).  

Recent Financials

Aussie Broadband delivered impressive growth over the first half of FY21 – exceeding even its own prospectus forecasts. Revenue for the half came in at $157.4 million, an uplift of 89% over the prior corresponding period, and 4% ahead of the prospectus target. Earnings before interest, tax, depreciation and amortisation expenses (EBITDA) also came in ahead of forecast, at $7.3 million.

It was a strong half for the company, in which it increased its share of the NBN fixed-line and fixed-wireless technologies market to 4.2% (from just 2.8% a year earlier). In total, Aussie Broadband provided over 340,000 broadband connections, a half-on-half increase of 31%.

Outlook

The company is continuing to track ahead of its prospectus forecast for FY21. Aussie Broadband initially stated that it was targeting normalised EBITDA of $12.3 million for FY21 in its prospectus. Normalised EBITDA excludes the costs associated with the company’s initial public offering (IPO).

Two guidance upgrades later – one included in the half year report, and another in late May – Aussie Broadband now expects normalised EBITDA for the full year to be between $17 million and $20 million. That could be as much as 63% ahead of the prospectus.

The company credits the upgrades to high rates of growth in its retail and business segments, good cost management, and promotional rebates. The one risk to that forecast could be that it only assumes Victoria’s May snap lockdown would last for one week, whereas it was subsequently extended for a second. Aussie Broadband notes that its costs tend to be higher during these periods as broadband usage surges. To what extent that may weigh on the company’s full year EBITDA remains to be seen.

The post Aussie Broadband (ASX:ABB) shares are up almost 50% since their IPO appeared first on The Motley Fool Australia.

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Motley Fool contributor Rhys Brock has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended Aussie Broadband Limited. The Motley Fool Australia owns shares of and has recommended Telstra Corporation Limited. The Motley Fool Australia has recommended Aussie Broadband Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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Earlier today I looked at a couple of small cap shares that have been tipped as buys. You can read about those here.

But if small caps are too high up on the risk scale for your investment tastes, then you might want to take a look at the blue chip share listed below. This is because blue chip shares generally carry much less risk than small caps and are therefore arguably more suitable to the conservative investor.

Which blue chip?

The blue chip in question on this occasion is SEEK Limited (ASX: SEK).

It is of course the leading job listings company in the ANZ region with its seek.com website. In addition to this, the company has a number of similar businesses around the world and an investments business.

SEEK has been performing very positively in FY 2021 thanks to Australia’s impressive economic recovery from the pandemic. This led to the company recently upgrading its full year guidance for FY 2021.

Pleasingly, with Australia’s unemployment rate tipped to continue reducing over the coming years, job advertisement volumes are expected to rise. Combined with the removal of discounts, price increases, and further depth product penetration, this bodes well for its growth prospects.

Particularly given its incredibly strong market position. For example, at the end of December, SEEK ANZ had 16 million candidate profiles, 35 million monthly visits, and 160,000 active hirers. This led to the company having five times more placements than its nearest competitor.

Recent broker upgrade

One broker that is a big fan of SEEK is Macquarie. Earlier this month, the broker upgraded the company’s shares to an outperform rating with an improved price target of $40.00. This compares to the latest SEEK share price of $33.05.

It believes the company is well-placed to benefit from ad volume growth and a tight labour market.

Macquarie expects the Australian unemployment rate to fall from 5.5% to ~4% during 2023, underpinning a 25% increase in job ad volumes in FY 2022.

The post Is the SEEK (ASX:SEK) share price in the buy zone for blue chip investors? appeared first on The Motley Fool Australia.

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Motley Fool contributor James Mickleboro owns shares of SEEK Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended SEEK Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Warren Buffett clearly doesn’t like the Robinhood trading platform very much. At Berkshire Hathaway‘s (NYSE: BRK.A) (NYSE: BRK.B) annual shareholder meeting in May, the famous investor said that Robinhood has “become a very significant part of the casino aspect, the casino group, that has joined into the stock market in the last year or year and a half.” 

That doesn’t mean that Buffett doesn’t see eye-to-eye with Robinhood investors at times, though. Several of the stocks most widely held by investors on the no-commission trading platform are also in Berkshire’s portfolio. Here are Buffett’s three favorite Robinhood stocks based on the size of Berkshire’s stake in each stock. 

Apple

The second-most popular stock on Robinhood is literally the Apple (NASDAQ: AAPL) of Buffett’s eye. Apple is by far the largest holding in Berkshire’s equity portfolio. Last year, Buffett said that Apple was “probably the best business I know in the world.” 

Why does the legendary investor like Apple so much? For one thing, Buffett has always preferred businesses that generate high margins and return on equity. At Berkshire’s latest shareholder meeting, he listed Apple first as one of a handful of “terrific examples” of such businesses.

The Oracle of Omaha also likes that Apple markets “sticky” products. This is a reference to the company’s ability to retain customers in its ecosystem built around the iPhone. Companies such as Apple that have loyal customer bases also tend to have strong pricing power. 

It seems likely that Buffett and Robinhood investors will be proven right about prizing Apple stock so highly. The increased adoption of 5G networks should continue to fuel higher iPhone sales. Apple’s focus on augmented reality (AR) apps and devices could also pay off handsomely over the next few years.

Bank of America

Bank of America (NYSE: BAC) is without question the most popular bank stock among Robinhood investors. It’s also clearly Buffett’s favorite bank stock, ranking behind only Apple as the largest position in Berkshire’s portfolio.

Buffett has long liked bank stocks, in general, in large part because of their ability to deliver a strong return on equity. However, over the last few quarters he has significantly trimmed Berkshire’s stakes in bank stocks — with the notable exception of Bank of America (BoA). 

There are probably three key reasons why Buffett remains such a big fan of BoA. He respects the company’s management team, led by CEO Brian Moynihan. Buffett likely thinks that BoA will continue to generate increasing profits. He also almost certainly views the big bank’s strong capitalization as a major plus. 

Those three attributes could very well translate to solid gains for Buffett and for many Robinhood investors. The Federal Reserve Board has already indicated that interest rate increases will be on the way in the not-too-distant future. Bank of America ranks as one of the top stocks set to benefit from these coming rate hikes.

Coca-Cola

Coca-Cola (NYSE: KO) might be a somewhat surprising member of Robinhood’s top 100 most popular stocks. The beverage giant hasn’t delivered impressive returns in recent years. However, there’s no surprise whatsoever that Coca-Cola is a Buffett favorite. The stock ranks as Berkshire’s fourth-largest holding.

Buffett thinks so highly of Coke primarily because of the company’s strong moat — the Coca-Cola brand. He understands that most customers won’t go for a rival product even if it’s priced lower. 

Of course, Buffett also knows that the best businesses are built to last. Coca-Cola, founded in 1892, has been the world’s leading soft drink maker for longer than most people have been alive. 

Coca-Cola stock might not deliver the biggest returns for Buffett or Robinhood investors going forward. However, it’s still a solid pick and remains a dividend investor’s dream. Buffett, who has publicly stated that he drinks five of the company’s soft drinks each day, will probably have a Coke and a smile for years to come as those dividends flow in.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Warren Buffett’s 3 favorite Robinhood stocks appeared first on The Motley Fool Australia.

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Keith Speights owns shares of Apple, Bank of America, and Berkshire Hathaway (B shares). Bank of America is an advertising partner of The Ascent, a Motley Fool company. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended Apple and Berkshire Hathaway (B shares). The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), long March 2023 $120 calls on Apple, short January 2023 $200 puts on Berkshire Hathaway (B shares), short January 2023 $265 calls on Berkshire Hathaway (B shares), and short March 2023 $130 calls on Apple. The Motley Fool Australia has recommended Apple and Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Cyclopharm Limited (ASX: CYC) shares are taking an absolute pummelling today. At the time of writing, the Cyclopharm share price is crashing 41.61% lower to $1.60.

Below, we take a look at the ASX healthcare company’s latest market update.

What did Cyclopharm announce?

The Cyclopharm share price is crumbling after the company reported on the latest developments regarding approval of its Technegas medical imaging drug in the United States.

The radiopharmaceutical company said the United States Food and Drug Administration (FDA) had provided a Complete Response Letter (CRL) for its New Drug Application (NDA).

In that response, the FDA said it could not approve the NDA for Technegas as it stands. The agency gave Cyclopharm a list of items it needs to address within 12 months to potentially gain approval. The company stated it expects to be able to sort out the required issues and hopes to still secure approval in 2022.

Commenting on the FDA response, James McBrayer, Cyclopharm CEO said:

While the elements in the USFDA’s CLR letter are attainable within the required timeframe, we are disappointed with this news of the additional technical information requests. Effectively the CLR has extended the expected approval timeframe by around nine months.

We have complete confidence that we can address these matters and do what is required to expedite this process. We now have clarity as to what will satisfy the USFDA’s expectations and will commence work on the response immediately.

McBrayer said Cyclopharm is working closely with the FDA in order to address the outstanding elements still required.

The company updated its guidance for gaining FDA approval from the second half of 2021 to the second half of 2022. It said this delay will not influence its ability to fund the rest of the approval process. The US is a core part of the company’s growth plans, which it estimates to be worth US$180 million (AU$237 million) per year.

Cyclopharm already sells Technegas in 60 other nations, with over 4.4 million patients using the medical imaging drug so far.

Cyclopharm share price snapshot

With today’s early losses factored in, Cyclopharm shares have only gained around 19% over the past 12 months, compared to the 25% gains posted by the All Ordinaries Index (ASX: XAO).

Year to date, the Cyclopharm share price is now down by 36%.

The post Why the Cyclopharm (ASX:CYC) share price is crashing 42% lower appeared first on The Motley Fool Australia.

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The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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The Mineral Resources Limited (ASX: MIN) share price is having a day out today, nearing its all-time high. Investors appear to be buoyant on the company’s prospects, particularly after a number of broker upgrades recently.

At the time of writing, the mining services company’s shares fetching for $50.99, up 0.43%.

What’s going on with the Mineral Resources share price?

Investors are continuing to snap up Mineral Resources shares despite no recent announcement from the company.

However, in its last update to the ASX in May, Mineral Resources provided a performance snapshot at the Macquarie Conference.

The company highlighted that its key financial metrics have surged during the first half of FY21. As such, revenue grew to $1.5 billion, up 55% over the prior corresponding period. Underlying earnings before interest, tax, depreciation and amortisation (EBITDA) also increased to $763 million, up 131%.

The robust result came off the back of an upswing in iron ore production volumes. This is despite the company experiencing haulage constraints caused by COVID-19 state border closures.

Mineral Resources’ lithium production remained consistent compared to the previous comparable period. Spodumene mined slightly increased, along with production and shipping.

And lastly, natural gas exploration and development activities are on track. The company is seeking to secure its own natural gas supply to provide energy security for future mining operations.

Mineral Resources received two prospective gas exploration permits in the onshore Perth and Northern Carnarvon Basins in March 2021.

What do the brokers think?

Since its May 2021 investor presentation, several brokers raised their price targets for Mineral Resources.

Global investment bank Citi lifted its 12-month outlook by 2% to $51.00. Following suit, Macquarie appeared bullish on the Mineral Resources share price, raising its price by 20% to $73.00. This implies an upside of roughly 40% on the current share price.

More recently though, JPMorgan also lifted it original note by 8.4% to $51.70 for the mining services company.

The Mineral Resources share price has accelerated by more than 140% over the past year, and is up 35% year-to-date.

The post Mineral Resources (ASX:MIN) share price nears all-time high appeared first on The Motley Fool Australia.

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Motley Fool contributor Aaron Teboneras has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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The Nanosonics Ltd (ASX:NAN) share price is wobbling in morning trade, following an announcement made this morning that the company is set to launch a new infection prevention digital product platform, known as AuditPro.

At the time of writing, Nanosonics shares are down 0.67% to $5.93 apiece.

What did Nanosonics announce today?

According to Nanosonics, its new digital-based platform AuditPro “provides you with real-time intelligence on ultrasound probes, operators, and infection control events to manage infection prevention practices across your organisation.”

AuditPro operates via a mobile scanning device that also comes with a subscription to a browser-based application. The company says the platform has potential application across a range of medical instruments, for traceability, reporting and compliance, and also highlights it will provide a new revenue stream.

Nanosonics chief executive officer and president Michael Kavanagh said:

With the introduction of Nanosonics AuditPro, together with our existing trophon technology and other product developments currently progressing through our R&D program, Nanosonics continues to focus on the delivery of a portfolio of innovative infection prevention solutions to market.

AuditPro is expected for release at the Association for Professionals in Infection Control (APIC) on 28 June 2021, with a full rollout across the US anticipated for July 2021.

About the Nanosonics share price

The Nanosonics share price has gained almost 7% over the past month, but is in the red 28% year-to-date at the time of writing. Over the previous 5 days, Nanosonics shares have gained 1.7% at the time of writing.

The company also has a market capitalisation of around $1.8 billion at the time of writing, and trades at a price-to-earnings ratio (P/E) of around 312. Currently, Nanosonics shares are trading below their 52-week high of $8.25.

The post What’s moving the Nanosonics (ASX:NAN) share price today? appeared first on The Motley Fool Australia.

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The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended Nanosonics Limited. The Motley Fool Australia owns shares of and has recommended Nanosonics Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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The Atomo Diagnostics Ltd (ASX: AT1) share price has been a very strong performer on Monday.

In early trade, the medical device company’s shares rocketed as much as 59% higher to 21.5 cents.

This certainly will be a welcome relief to shareholders given that the Atomo Diagnostics share price dropped to a 52-week low of 13 cents on Friday.

Why is the Atomo Diagnostics share price rocketing higher?

Investors have been bidding the Atomo Diagnostics share price higher today after it revealed that its partner, Access Bio, has received Emergency Use Authorisation (EUA) from the U.S. Food and Drug Administration (FDA) for point-of-care use of its CareStart EZ COVID-19 test.

CareStart EZ COVID-19 is a rapid antibody test made by combining an integrated device developed by Atomo and a rapid COVID-19 antibody test strip from Access Bio.

Atomo entered into an agreement last year to supply Access Bio with its unique, integrated rapid diagnostic test (RDT) devices for use in North America with Access Bio’s rapid test strip for detection of antibodies to COVID-19. This was subject to FDA clearance, which has now been received.

In addition to this, the two parties have previously signed an agreement that grants Atomo non-exclusive rights to market and distribute Access Bio’s COVID-19 rapid antigen test in Australia, New Zealand and India. This remains subject to obtaining the required regulatory approvals in each jurisdiction.

For now, the EUA allows sales of the CareStart EZ COVID-19 test for use in point-of-care settings. This means places such as doctors’ offices, hospitals and emergency rooms in the United States. However, Atomo and Access Bio are in discussions regarding their COVID-19 rapid test commercial arrangements and will keep the market informed as to any material developments.

Atomo Diagnostics’ Managing Director John Kelly said, “We are happy that our integrated test device has enabled Access Bio to secure EUA for point-of-care use for their COVID19 antibody test and for it to be used in a broad range of non-laboratory settings in the US.”

It is worth noting, however, that no details have been provided in respect to what impact this news will have on the company’s revenues.

The post Atomo Diagnostics (ASX:AT1) share price rockets 59% on COVID-19 test update appeared first on The Motley Fool Australia.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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Shares in Bapcor Ltd (ASX: BAP) have slipped slightly in early trade after the company gave the market a glimpse into its next 5 years of operation. The Bapcor share price is down 0.72%, trading at $8.28 at the time of writing.

Bapcor released the outline of its latest 5-year strategy to the ASX today after its investor day event was cancelled due to COVID-19.

The company provides vehicle parts, accessories, equipment, and services through brands including Autobarn, Autopro, Midas, and Burson.

Bapcor’s 5-year goals

If Bapcor’s 5-year strategy is successfully carried out, the company will increase its presence in Australia, New Zealand, and Asia, and optimise several factors of its business.

New stores

Bapcor wants to open more than 694 new stores over the next 5 years.

Of those, 60 would be “trade focused” and supply parts to workshops in Australia and New Zealand, while 41 would be selling parts for light and heavy commercial vehicles.

The company also aims to open 77 new Autobarn stores, and 96 new Autopro stores.

It plans to open 395 workshops in Australia and another 31 in New Zealand.

Finally, in 5 years’ time, Bapcor hopes to have at least 60 stores in Thailand, building on the 6 stores it currently operates in that country.

Asian expansion

In March, Bapcor announced it was to acquire 25% of Tye Soon. It expects this acquisition to help its planned expansion in Asia.

Over the next 5 years Bapcor wants to increase turnover at its Thailand stores from $4 million to $100 million annually.

It also plans to grow its total Asian turnover to $500 million annually.

Currently, Bapcor and Tye Soon bring in a combined $204 million from Asian markets each year.

Supply chain, technology, ESG, and own brand targets

To optimise its business, Bapcor will be consolidating the work of its 13 Victorian distribution centres into 1 entity.

The new distribution centre will use “state of the art” technology to maximise its efficiency.

Bapcor will then replicate its consolidation process in Queensland, where it currently has 7 distribution centres.

Additionally, the company is focusing on increasing its own brands’ sales targets in all its business segments.

It’s also upgrading many of its business-to-business and business-to-customer e-commerce platforms, its point-of-sale system, and its workshops’ support system.

Finally, the company is prioritising environmental, social, and governance (ESG) strategies. One of its ESG strategies is to be a focus on employee training.

Bapcor share price snapshot

2021 has been good for the Bapcor share price, which has gained 6% year to date.

It’s also 42% higher than it was this time last year.

The company has a market capitalisation of around $2.8 billion, with approximately 339 million shares outstanding.

The post What’s happening with the Bapcor (ASX:BAP) share price today? appeared first on The Motley Fool Australia.

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Motley Fool contributor Brooke Cooper has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Bapcor. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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The Nitro Software Ltd (ASX: NTO) share price is on the move today after the company announced an acquisition.

Prior to market open, shares in the document productivity company were $3.36 apiece. In early trade, the Nitro Software share price is trading 2.38% higher at $3.44.

The deal marks Nitro’s first acquisition since its ASX initial public offering (IPO) in December 2019. Let’s take a closer look at the details.

Nitro Software share price gets a boost

Investors are driving up the Nitro Software share price after the company announced its first acquisition since joining the ASX ranks.

According to its release, Nitro has entered an agreement to acquire the PDFpen technology from US-based Smile Inc for $6 million in cash. Smile was founded in 2003 and develops productivity software for Mac, Windows, Chrome, iPhone, and iPad.

PDFpen specifically is a market-leading suite of PDF productivity applications for Mac, iPhone, and iPad. The technology brings document viewing, reviewing, collaboration, form filling, search, redacting, and export tools to the user’s fingertips.

While Nitro’s eSigning feature is already available on any device with a web browser, the acquisition brings native PDF productivity support to Apple product users.

Payment for the acquisition will be funded from Nitro Software’s existing cash reserves. The company’s cash balance stood at $41.8 million at the end of March 2021.

CEO commentary

Additionally, the company stated the expansion of its platform comes at a critical time for customers. The work from home tailwinds driven by COVID-19 has accelerated the digital transformation, including the use of Mac and mobile devices.

The acquisition of PDFpen means Nitro’s suite extends to virtually every device and operating system.

Nitro Co-founder and chief executive officer Sam Chandler stated:

As the first acquisition since our IPO, PDFpen marks a significant strategic milestone for Nitro. The addition of Mac and mobile capabilities to our platform better enables us to serve businesses and individuals on any device or operating system at a time when digital transformation has never been more relevant or more urgent for organisations around the world. It represents a major advance in Nitro’s vision to make document productivity easy, powerful and available to all.

The transaction is subject to customary closing conditions. If all goes to plan, these will be met on or before 9 July 2021. Nitro hinted that its significant cash reserves allow it to pursue further targets if they arise.

Outlook reaffirmed

In other news possibly boosting the Nitro share price today, the company took the opportunity to also reaffirm its FY21 guidance.

Nitro still anticipates ending annual recurring revenue to be between $39 million and $42 million. Revenue is expected to range between $45 million and $49 million. Meanwhile operating earnings before interest, tax, depreciation, and amortisation (EBITDA) is slated to be a loss between $11 million and $13 million.

The Nitro Software share price has returned around 128% over the past 12 months.

The post Nitro Software (ASX:NTO) share price lifts following acquisition appeared first on The Motley Fool Australia.

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Motley Fool contributor Mitchell Lawler owns shares of Apple. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended Apple. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool Australia has recommended Apple and Nitro Software Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

According to The Verge, nearly 20% of Facebook‘s (NASDAQ: FB) employees are working exclusively on virtual reality (VR) and augmented reality (AR). Plus, the company has been acquiring small VR studios for years, most recently BigBox VR (creator of Population: One, the Fortnite of VR) and Unit 2 Games (creator of Craya, a Roblox-esque VR gaming platform), for undisclosed sums. 

These continuous investments in talent and studio acquisitions may seem steep for a business segment that accounts for less than 3% of Facebook’s top line. But Mark Zuckerberg’s ambitious vision for VR is powering a shopping spree that likely won’t stop anytime soon. Is Facebook ahead of the game, or will its Oculus VR venture fail to move the needle?

The future of VR gaming

Zuckerberg has been talking up VR more than usual lately, partly thanks to accelerated adoption of the Oculus Quest 2 VR headset (according to Facebook — but the company does not explicitly report figures for sold VR hardware). The CEO’s first major talking point in Facebook’s latest earnings report was VR and AR, predicting “augmented and virtual reality to unlock a massive amount of value, both in people’s lives and the economy overall.”

His excitement about the technology is not unwarranted — Fortune Business Insights forecasts that the global market for VR gaming will reach $45.2 billion by 2027 (from $5.1 billion in 2019). This translates to a compounded annual growth rate (CAGR) of 31.8%, compared to a CAGR of only 5.3% for the overall gaming console market over the same forecast period.  

How Facebook got ahead

Facebook’s strategy for VR gaming domination starts with laying a solid foundation of technology and developer talent. In classic Facebook fashion, its primary tactic has been acquiring existing VR hardware and software companies.

Since acquiring Oculus VR for $2 billion in 2014, the company has made significant progress in improving its VR hardware to better suit customers’ needs. The current Oculus Quest 2 is a stand-alone headset (i.e., no wires to trip on or tangle up while playing) and requires no external device (such as a console or PC). Conversely, Sony‘s (NYSE: SONY) wired PlayStation VR headset requires a PlayStation console. The Quest 2’s wireless, low-hardware conveniences combined with its lower price point relative to any other major headset on the market give Facebook a competitive edge when it comes to hardware.  

But even the best VR headset is useless without great games, making Facebook’s VR studio acquisitions crucial to building up its VR ecosystem. By acquiring small yet high-performing studios, Facebook is securing revenue from already-popular VR games on Oculus and retaining top software developers to create exclusive content within the Oculus platform. Considering the company’s standard four-year stock option vesting schedule, it’s unlikely that developers from studios like BigBox or Unit 2 will jump ship to work for a competitor anytime soon.

Why it’ll stay ahead

If you know Facebook’s business model, you’re probably wondering when ads come into play. The company has announced that it will begin testing ads in select games on the Oculus platform, but it’s still up in the air what exactly the ad experience will look like once testing begins — and how VR gamers will react. 

If the company can manage to integrate ads without breaking the immersive gaming experience, it will help developers earn more revenue (thus, attracting more developers to the Oculus platform) and could even make games more realistic. For example, real ads appearing on in-game TV screens and billboards would not break players’ immersion in their gaming world, while still driving revenue for developers and Facebook.

Beyond attracting developers for top-tier content, Facebook has a unique edge in attracting consumers as well — its massive social networking user base. No other VR headset can offer such easy accessibility (low price point with no required console purchase) and such a high potential for network effects.

For example, it would be much easier for a friend to influence you to purchase a $300 all-in-one VR headset than a PlayStation console and headset, which would total more than twice the cost of the Quest 2. Don’t get me wrong — Sony is a leading competitor in the VR gaming space and has shipped the most VR hardware units to date, but the company’s network effects are arguably limited to existing PlayStation owners (about 15.7 million monthly active users, between the PS4 and the PS5).  

Facebook’s 2.8 billion monthly active users have much more potential to add value to the Oculus platform by sheer volume of players, especially when it comes to popular social VR games like Population: One, Craya, and Beat Saber Multiplayer (developed by yet another Facebook-acquired studio, Beat Games). Social gaming experiences are inherently more valuable with more players.

While some VR multiplayer games are cross-platform (i.e., an Oculus player can game with a PS VR player), Facebook will likely tighten up its exclusive content offerings to attract and retain players. As long as the company rolls out ad content in a way that feels relatively organic to Oculus players, Facebook is set up for success in rapidly gaining market share in VR gaming.

What to watch for

While Facebook’s VR gaming revenue isn’t reported explicitly (yet), the company’s “other revenue” business segment is primarily Oculus. In Facebook’s first-quarter 2021 earnings report, this segment grew 146% year over year to $732 million, implying an impressive growth rate for the company’s VR business. Further, the Quest 2 has become the most used VR headset on popular gaming platform Steam, and by many estimates the Quest 2 is selling at least twice as fast as PlayStation VR, despite lagging behind in current overall market share.  

Keep an eye on this “other revenue” segment in future earnings reports, as well as any hard figures reported by the company on VR gaming revenue. More cautious investors may also want to wait for Facebook to complete its in-game ad testing process before investing based on the company’s growth potential in VR. It is undoubtedly a risk to user growth if ad content is not executed smoothly.

It’s impossible to dive into every point in Facebook’s value and growth story in one sitting, but the stock seems fairly valued given its growth potential — FB is even rated “undervalued” by Morningstar. The company’s wide economic moat in social gaming is unmatched thanks to a massive user base and vast user data, and these competitive advantages can easily translate to driving profits and market share for its VR gaming business.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post How Facebook is quietly preparing to dominate virtual reality appeared first on The Motley Fool Australia.

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Taylor Weldon has no position in any of the stocks mentioned. 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. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended Facebook. The Motley Fool Australia has recommended Facebook. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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