3 Stocks to Watch in Hardware

By Markets Fool.com

In the technology world, hardware seems to move forward in big leaps, followed by slower incremental improvements.

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Apple creates the first mass-appeal smartphone -- sorry,Blackberry , your devices were not quite smartphones -- and then the rest of the wireless world works to catch up. It's hard to say that the iPhone maker has done more than evolve its product in the years since it launched, even though it led the revolution.

As we look at the future of hardware, the companies to watch are the ones that might take that next leap forward to create a whole new category, and the ones that are evolving existing products in innovative ways. That makes three big players --Microsoft, Facebook , and Amazon -- three stocks to watch in the hardware space.

The would-be king
Microsoft has never been a major hardware player aside from its Xbox gaming console, but that appears to be changing under CEO Satya Nadella. The new leader, who just jettisoned hardware boss Stephen Elop, has shown that the company is willing to move aggressively into hardware to accomplish two things.

First, the company has invested heavily in its Surface hybrid tablet laptop/tablet not only to attempt to take market share from Apple iPad and/or MacBook Air, but also to pave the way for its OEM partners. Surface 3 and Surface 3 Pro are mild hits, but the real success for the line is how it has spurred a world of innovation. There are countless hybrids on the shelves of electronics stores, and that may never have happened if Microsoft had not led the way.

The company's second area of hardware innovation -- Windows Phones -- could ultimately have the same effect on partners; but for now, it's Microsoft responding to necessity. Had it not purchased Nokia's wireless division and started to make its own phones, than Windows Phone may not exist.

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It's too early to say if that effort has paid off -- especially because the company still has very little market share for its phone, but that could change with the release of Windows 10. The new OS will use the same apps across all platforms, and that should make the company's phones much more attractive to buyers.

Microsoft bills the Surface Pro 3 as "the tablet that can replace your laptop." Source: Microsoft.

The next big thing
Facebook may seem like an odd pick for a story about hardware stocks to watch because the company is not known for being in that business. But Facebook's next big growth may not be from one of its apps -- it could be from a piece of hardware -- the Oculus Rift virtual reality headset.

VR may well be the next big thing -- Microsoft is also in the space with its HoloLens -- and Oculus may be a perfect match for the social network. Facebook CEO explained why he was excited about buying the company in a post on Facebook at the time of the purchase.

They build virtual reality technology, like the Oculus Rift headset. When you put it on, you enter a completely immersive computer-generated environment, like a game or a movie scene or a place far away. The incredible thing about the technology is that you feel like you're actually present in another place with other people. People who try it say it's different from anything they've ever experienced in their lives.

Oculus's mission is to enable you to experience the impossible. Their technology opens up the possibility of completely new kinds of experiences.

Everyone talks about using VR for games, and Zuckerberg acknowledged that as a use for Oculus Rift; but another application is creating new paths for human interaction. That's what Facebook does best, and the ability to apply VR to social interaction could be the "killer" app that helps the technology move from gamers to mainstream appeal.

A little bit of both
Amazon has done a good job in hardware with its Kindle tablets and Fire TV set-top streaming box and stick. Both of those are evolutions of existing categories. Neither is a game changer, but both are well-executed product families at very good prices.

The company could quietly have an unexpected hit with its Echo wireless speaker/digital assistant. When it launched, the product was a bit of an oddity. It did a good job streaming music and providing some very basic voice-controlled services, like weather reports.

In the months since the $199 product was rolled out -- Prime members could originally buy it for $99, and can now buy it for $149 -- the company has been steadily rolling out new services. It now can do a lot more including answering questions like, "How many teaspoons are in a tablespoon?" and "When do the Red Sox play next?" Echo can also be used for ordering from Amazon -- a process which was very clunky at launch, but has improved as new software updates have been released.

It's still a bit of a novelty product, but it becomes more useful every month. With Amazon now creating a developer's kit and throwing Echo open to outside app creators, that should continue.

With its excellent voice recognition interface, Echo could easily become a hub for controlling a digital home, with the added benefit for the company of putting a little Amazon store in every living room.

The article 3 Stocks to Watch in Hardware originally appeared on Fool.com.

Daniel Kline owns shares of Apple, Facebook, and Microsoft. He owns a Surface, an Echo, and multiple Kindle devices. The Motley Fool recommends Amazon.com, Apple, and Facebook. The Motley Fool owns shares of Amazon.com, Apple, and Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.