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

Interactive experiences instead of games

Sticking to mobile-only gaming

Licensing content from third parties

Avoid console and PC games

Now what

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

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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.

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Taylor Weldon has no position in any of the stocks mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, 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 Alphabet (A shares), Alphabet (C shares), Amazon, Netflix, and Walt Disney. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool Australia has recommended Alphabet (A shares), Alphabet (C shares), Amazon, Netflix, and Walt Disney. 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.

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.

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.

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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.

Back in 2018, CEO Elon Musk shared in a Tweet that Tesla (NASDAQ: TSLA) will open an old-school drive-in restaurant featuring roller skates and famous movie clips in a California Supercharger station. Historically, Musk has made some bold claims online, and not all of his ideas have come to fruition.

For this reason, it made headlines when Tesla actually filed for trademarks in the restaurant services industry -- over three years later.  Despite the hype, if Tesla goes through with a restaurant in its Supercharger network, investors need to carefully consider whether it is a worthwhile investment of capital and management energy.

The problem Tesla wants to solve

Tesla's Supercharger network consists of 908 Supercharger stations  across the country, each with varying numbers of individual Superchargers. The problem is that charging a Tesla takes time, and the company wants to provide Tesla drivers with entertainment while they wait to hit the road again.

However, doing some digging on Tesla's Supercharger map reveals some insight into this problem. In the U.S., not a single Supercharger can be found beyond a short walking distance to a restaurant, coffee shop, grocery store, or service plaza. Tesla has located most Supercharger stations near several of these establishments, and some even have direct access to shopping centers.  

With Supercharger stations already providing Tesla drivers with options for spending their downtime, the Supercharger network does not translate to a surefire captive market for Tesla. However, Elon is set on bringing retro-style entertainment to the Supercharger network in hopes that it will nonetheless drive revenue and attract new customers.

Is this problem worth solving?

Before addressing this question, it's important to understand all the charging options that Tesla drivers have. Supercharger stations, destination chargers, and at-home chargers all have different use cases, pros, and cons.

Supercharger stations are located in most major cities and along popular travel routes for high-speed charging during long-distance drives.  A standard Tesla Model 3 can charge to full capacity in under an hour at a Supercharger. Charging fees can vary based on location, charge volume, and seasonality but generally run around 28 cents per kilowatt-hour (kWh).  

Destination chargers are installed by Tesla's 'Charging Partners' -- usually shopping centers, hotels, movie theaters, or restaurants -- and allow patrons of those businesses to charge for free. A destination charger's speed is significantly lower than a Supercharger, but drivers can easily reach half or full battery capacity for free while shopping or staying at a hotel.

Drivers' final charging option is to use their at-home charger, which is included with every Tesla vehicle purchase. The added utility expense varies based on location, but the average U.S. electricity rate runs about 13.2 cents per kWh -- less than half the price of using a Supercharger.  

With the ability to charge cheaply at home and free at over 4,500 destination chargers across the country, it's perfectly logical in many cases for a Tesla driver to never use a Supercharger. Essentially, the only use case for a Supercharger is a road trip, and even in those cases many drivers would likely choose other food, coffee, or shopping options in the area over Tesla's proposed retro diner while they wait.

Knowing this, it is difficult to argue that it would be worth it for Tesla to invest so heavily in enhancing user experience in the less-frequented Supercharger network. Plus, considering the business incentive for being a Tesla Charging Partner, it's plausible to expect businesses to open destination chargers at a faster rate than Tesla launches new Supercharger stations.

Tesla, keep your eyes on the road

There is undoubtedly a lucrative captive market opportunity in electric vehicle charging in general. However, that opportunity will likely be more valuable for Tesla's Charging Partners via destination chargers than for Tesla via its Supercharger network because of the frequency of their respective usage and driver options during their charge time.

Especially considering the restaurant industry's infamously razor-thin margins, most investors would prefer to see Tesla stay focused on expanding production capacity, recovering its sales slump in China, and fixing the "significant mistakes" it made in rolling out its solar roof business. If not, the diversion of company resources to a restaurant venture will very likely hurt the stock.

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

The post Why Tesla's restaurant plan is an unprofitable detour appeared first on The Motley Fool Australia.

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.

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Taylor Weldon 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 Tesla. 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.