New virtual reality (VR) and closely related augmented reality (AR) technology have been hyped by a few entertainment headset makers like Facebook (NASDAQ: FB), Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG), and Samsung (NASDAQOTH: SSNLF). While the technology is traditionally associated with video games, the market is expanding to encompass a broader range of entertainment like movies and is finding its way into some workplaces.
Last year, the combined VR and AR industry racked up a total of $6.1 billion in sales. That's not much in the grand scheme of things, but some estimates have those sales surging to $13.9 billion in 2017 and to as much as $140 billion in a short three year period. If such growth transpires, the fledgling technology is worth putting some money on now.
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The problem is that there aren't many pure-play VR investments out there -- investors are primarily left with technology giants that are betting on the tech to drive incremental growth. But with sales possibly taking off in the years to come, the various stocks of those companies are an intriguing option nonetheless.
End hardware makers
The obvious place to start are the companies selling VR and AR devices to consumers. Most of these companies are also developing content stores for those devices, and the expectation is that most of VR sales will ultimately come from these devices and content produced for them. Here are the most prominent players.
Arguably the biggest fight for the growing VR market is between these companies and their competing devices. Most big tech firms have developed some sort of headset and/or content store, and their success in developing, marketing, and selling to consumers could ultimately be the driver that determines the fate of the industry.
In 2016, Sony's Playstation VR was the best seller because of its easy adoption among gamers. That underpins the need to make a convincing argument to non-gamers that VR is a good entertainment option.
Chip and software providers
Besides the end hardware, chip maker companies are helping with the advance of VR with new designs. In most cases, sales of VR chips are small and don't show up on these company's radar as of yet, but if the industry takes off it could help them drive incremental growth.
While these chip makers don't hold the same sway over the VR industry like the big device makers do, investors can still buy shares of a well-diversified company that has a new outlet for growth.
VR making it mainstream?
Besides end hardware and chipsets, some companies are also betting on VR in other unique ways to offer new entertainment experiences and boost business. Ideas have stretched from VR roller coasters to VR movies. In addition, some companies are trying to use VR and AR in the workplace. One such example is from an aviation industry supplier, Rockwell Collins (NYSE: COL), that is using VR to enhance its customer experience with virtual training.
Where investors should start
The VR industry is still young and developing, and as such I think companies working on end user experiences have the most to gain. Once devices get into the hands of consumers, revenues will be primarily driven by software. That makes the end hardware makers, which are also building out app and software development ecosystems, the best bet.
Chip makers and other companies trying to foster growth with VR will ultimately be dependent on end hardware makers being able to further develop the technology and effectively market it to consumers. The industry has been divvied up multiple ways and no clear-cut leader has emerged as of yet, and that competition could keep a lid on growth expectations.
If growth is slower than the lofty forecasts that have been made, the large tech companies at the forefront of VR development are a good bet as they aren't fully dependent on the tech taking off or not.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Nicholas Rossolillo owns shares of Ambarella and Facebook. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Ambarella, Facebook, GoPro, IMAX, and Nvidia. The Motley Fool owns shares of Qualcomm and has the following options: short January 2019 $12 calls on GoPro and long January 2019 $12 puts on GoPro. The Motley Fool recommends Intel. The Motley Fool has a disclosure policy.