Facebook’s (FB) Oculus acquisition did not receive a warm welcome from investors. Shares of the social network declined approximately 7.0% ($4.51) to $60.38 on Mar 26. The sell off showed that most of the investors did not share Facebook’s enthusiasm over the long-term prospect of the virtual reality computing market.
Oculus VR develops virtual reality headset, the Oculus Rift, and provides software development kit for building applications for which it has already received more than 75K orders. Although Facebook plans to extend it to new industries such as communications, media and entertainment and education, the technology is currently limited to gaming.
Hence, lack of positive response from popular game developers such as King Digital and Ubisoft is a major concern, which possibly alienated investors. Game makers are questioning the feasibility of the technology before moving their resources from mobile and console gaming development to virtual reality.
We also believe Facebook’s frantic pace of big acquisitions is turning into a major concern for investors. The company paid approximately $1.0 billion for Instagram and $19.0 billion for WhatsApp. Although Instagram’s success is a major achievement for Facebook, WhatsApp is expected to take some time to be profitable.
In such a scenario, Facebook is paying $2.0 billion for Oculus, of which $400.0 million will be in cash and 23.1 million shares of Facebook stock. However, for a technology that is yet to sell a single unit and needs huge long-term investments to gain mainstream adoption, $2 billion is a pretty big bet, in our view.
The purchase price also includes $300.0 million as earn-out in cash and stock based on the achievement of certain milestones. However, Facebook did not specify what milestones Oculus needs to achieve (and the time limit) in order to get this additional reward. This lack of transparency also did not go down well with investors, which initiated the sell-off.
Facebook’s recent initiatives — Internet.org and the two acquisitions (WhatsApp and Oculus) — are not expected to be significant contributors to its financials for some time. We believe these investments will put additional pressure on the social networking company to maintain its ad revenue growth momentum in the near term.
However, this may become difficult as Facebook continues to face intensifying competition from Google (GOOG), Yahoo (YHOO) and Twitter (TWTR) in the ad market.
Nevertheless, Facebook’s growing mobile user base (more than 1 billion) and Instagram’s increasing popularity (200 million users) will help it to grow in 2014. Moreover, the company’s strategy of acquiring next-generation technology strengthens its software developer talent base, which is also a major positive.
Currently, Facebook has a Zacks Rank #2 (Buy).
To read this article on Zacks.com click here.
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment