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Virtual Reality Could Disappoint Initially, Baird Says

Hype about virtual reality is in full gear ahead of the launch of Facebook ’s ( FB ) Oculus Rift. But don’t be surprised if VR meets consumer disappointment at first, Baird analyst Colin Sebastian said in a research report Monday. Talk about virtual reality for video games was at a fever pitch last week at the Game Developers Conference in San Francisco, Sebastian said. But, he added, the Oculus, the Vive from HTC and Valve, and Sony ’s ( SNE ) PlayStation VR face a serious risk of a “trough of disappointment” post launch. “While we expect each of the three VR platforms will likely sell out of limited initial production/shipments, adoption among a broader consumer base will require lower prices, more  attractive form factors and improved usability,” Sebastian said. “Additionally, we note there are still some issues with motion sickness.” He expects Oculus to sell 500,000 to 1 million units this year, which is less than consensus expectations for 1 million to 2 million units. Sony won’t hit the market with its VR headset until later this year, but its lower price and installed base of PlayStation 4 game consoles will give it a significant advantage, Sebastian said. The Oculus Rift is set to begin shipping on Monday in 20 countries, including the U.S. The Oculus headset costs $599 and requires a high-end PC with a graphics card. Bundles of the Oculus Rift and “Oculus-ready” PCs start at $1,499. The HTC Vive, a collaboration between smartphone maker HTC and video game developer Valve, is due to go on sale April 5 and cost $799. Like Oculus, Vive requires a high-end PC with a dedicated graphics processor. Sony announced last week that its PlayStation VR will go on sale in October in Asia, Europe and North America. The headset will be priced at $399 in the U.S. PlayStation VR users will need a PS4 game console, which now retails for about $350. Also, some games will require PlayStation Move and camera accessories to track players’ movements. Sony plans to sell a $500 bundle that includes the VR headset, two Move wand controllers, a PlayStation Camera and a “PlayStation VR Worlds” collection of themed mini-games. RELATED: Content Is King In The War For First Generation Virtual Reality  

Chip Game On: AMD May Undercut Nvidia With Intel Deal; Who’s In VR?

Advanced Micro Devices ( AMD ) might score an Intel ( INTC ) license deal. It would scoop  Tesla Motors ( TSLA ) partner Nvidia ( NVDA ), which receives $66 million in quarterly royalties from the No. 1 chipmaker, a Needham analyst says. But Argus analyst Jim Kelleher says that Nvidia has distanced itself from the PC market, instead focusing on niche growth areas like virtual reality (VR), autonomous vehicles, artificial intelligence, the Internet of Things and robotics. In VR, Facebook ( FB )-owned Oculus recommends Nvidia and Advanced Micro Devices graphics cards for its Rift series. This week, Oculus announced 30 new titles and demoed the tech at the Game Developers Conference in San Francisco, Calif. Graphics cards are outfitted with GPUs, or graphics processing units. Advanced ones are needed for many of today’s richly visual computing experiences that are computationally intensive — everything from the movement in gameplay to VR and many other kinds of applications. Nvidia’s Intel Royalty To Expire On Friday, Kelleher initiated coverage on Nvidia stock with a buy rating and a 39 price target, a day after Needham analyst Rajvindra Gill reiterated a hold rating on Nvidia stock following the Intel-Advanced Micro Devices rumor. Nvidia is on the IBD 50 list of leading growth stocks. In early trading on the stock market today , Nvidia stock surged 3.9%, trading near 34.10 and in buy range from a 33.16 cup-with-handle buy point. Advanced Micro Devices stock flew higher, up 4.3%, but usually trades considerably lower, near 3. Nvidia’s royalty deal with Intel is set to expire in 2017, and the GPU leader failed in December to defend its patents in a lawsuit against Samsung and Apple ( AAPL ) supplier Qualcomm ( QCOM ). “We don’t litigate for our business model,” CEO Jen-Hsun Huang told investors in November. “We don’t depend on licensing for our business model.” To offset the loss of Intel’s royalty stream — which will impact 2017 earnings per share by 25-30 cents — Nvidia needs to add $470 million in annual revenue, Gill wrote in a research report. He noted that Intel can continue using Nvidia patents filed before March 31, 2017. “While Nvidia has expressed interest in monetizing its GPU patent assets, we have seen little evidence to date that this will materialize,” he wrote. Nvidia controls 75%-80% of the GPU market, having long ago ceded the gaming console market to Advanced Micro Devices, which provides its RADEON semi-customized chips to Sony ( SNE ) and Microsoft ( MSFT ). Nvidia Shifts To Gaming In 2013, PC sales accounted for 42% of total Nvidia revenue. In 2016, gaming, enterprise graphics, data center and automotive brought in 85% of total revenue, dropping PC sales down to 9%. IP brought in 6%. Gaming represents a $20 billion market opportunity for Nvidia, leading $8 billion, $6.5 billion and $5 billion opportunities in the artificial intelligence, enterprise graphics and data center markets, respectively, Kelleher wrote. In fiscal 2016, gaming (largely PC) generated $2.8 billion of Nvidia’s total $5.01 billion in sales, up 30% year over year. Nvidia targets 5%-10% annual growth “based on gamers’ insatiable desire for improved graphics in games,” he wrote. Nvidia also pulled in $750 million in enterprise graphics, $340 million in data center and $320 million in automotive. In fiscal 2016, Nvidia’s automotive segment grew 80% year over year and includes Nvidia-Tesla-partnered GPUs. The U.S. Department of Energy selected Nvidia’s NVLink interconnected technology coupled with IBM ( IBM ) processors to power its next-generation supercomputers, 10 times faster than current supercomputers. Kelleher recognized that 2018 earnings might flatten as Nvidia makes further investments in “growth niches.” “We regard this as an acceptable trade-off for building share in markets that could drive significant growth in years to come,” he wrote.

Content Is King In The War For First Generation Virtual Reality

Nvidia ( NVDA )-powered virtual reality devices manufactured by HTC, Facebook ( FB )-owned Oculus, and Sony ( SNE ) dominated the Game Developers Conference this week in San Francisco. But software, not the hardware behind it, will likely determine if this new form of ingesting content will become the billion-dollar industry that is the source of dreams for developers at the show. “Content is going to be king,” Nvidia spokesman Bryan Del Rizzo told IBD in an interview on the GDC show floor. “And there’s much more than just games, there’s business applications.” Nvidia stock was down a fraction to 32.82 at the close Wednesday. The company has an IBD Composite Rating of 99, the highest possible. Facebook was down more than 1% to 111.02, and Sony was up 2.3% to 26.09. On Wednesday, Facebook-owned Oculus announced the names of the 30 titles that will be available for its Rift VR headset that starts shipping on March 28. Priced between $19 and $59, the selection includes traditional shoot-’em-up titles as well as several much-hyped “experiential” offerings. There are 11 more titles to be released in the future, though the company has not announced an exact date. Oculus will cost $599. When the price was first announced there was backlash from the gaming community which expected considerably less. In response, the company said it is not going to make a significant profit on the hardware — placing the burden for profit even further on the content that Facebook is able to bring to Oculus Rift. Meanwhile, HTC is going to market with 50 titles , but none of them will be exclusively available on its VR headset, called Vive, priced at $799. HTC did not immediately respond to a request for comment. E-commerce juggernaut Amazon.com ( AMZN ), Netflix ( NFLX ) and other content producers also are making VR plays, and exploring video opportunities. This week at the conference, Sony announced its own VR bet for the PlayStation console. Sony’s offering is priced below both its chief competitors at $399 — a $370 PlayStation 4 is required, plus several accessories — but will not get to market until October of this year. In its fiscal third-quarter earnings report to investors, the company said it had sold 37 million PlayStation 4 consoles since its launch in 2013. Though content may determine the industry’s future, the hardware it relies on — Nvidia’s graphics processing units generate the graphics — has never before been available to consumers. Of the PC-based VR options, Oculus Rift will hit the market first on March 28 — giving the Facebook-owned company a head start on HTC, which will hit the market sometime in April . Advanced Micro Devices ( AMD ) graphics cards also can be used to power VR headsets. “PCs will be the preeminent platform for VR,” says Del Rizzo. One issue for Sony is that the PlayStation 4 is aging. Several developers told IBD at the gaming conference that it could be a speed bump for bleeding-edge content. Sony declined to comment. Both Vive and Oculus Rift require top-of-the-line graphics hardware to run. Del Rizzo says that may generate more profits for the companies involved since gamers have a tendency to upgrade their graphics cards to ensure that they get the most out of the latest titles. Still, it’s too early to say VR will stick. There have been attempts to take VR mainstream in the past, notably in the 1990s, but they have failed — in large part because the hardware then was not as advanced as today. Now, at least with the devices from Sony and Oculus that IBD tested, the hardware appears to be able to deliver a palatable experience. The question becomes: Will developers and content creators produce offerings that will convince customers to open their wallets?