How Oculus Rift could transform Facebook (FB) into tech juggernaut

Rift presents some unique business opportunities that could transform Facebook’s core business away from advertising. Here’s how.

Facebook just dumped $2 billion ($400 million of it in cash) into its acquisition of virtual reality headset maker Oculus Rift. The news took some time to sink in for me. First, I thought about the possibilities. There are myriad applications for the device: gaming, education, shopping, communication and entertainment to name a few. Then, I thought about the business opportunity Rift presents and how it might impact Facebook’s stock price. A few things clicked:

1) Advertising is just one of many revenue opportunities. Sure, advertising will be possible: from commercials in the middle of immersive tv shows, sporting events and movies to in-game ads. I don’t think that’s key, though. Facebook already generates 90 percent of its revenue from advertising. Ultimately, the company views itself as a connection platform, not an ad agency.

2) Rift as a communication platform. Facebook CEO Mark Zuckerberg touts rift as a communications platform. That idea has potential, but it’s a long way off. After all, to use it as a communication platform you and the people you want to communicate with will need Rifts, too. It took a decade for cell phones to fully penetrate the developed world (from 18 percent adoption in 1997 to 97 percent adoption in 2007). I would guess that Rift-to-Rift communication is a long way off – at least five years.

Here’s where I really think Facebook could make money off Rift:

3) The Rift app store. Apple’s App Store generated $10 billion in revenue for Apple (AAPL) last year and made the company $1 billion in profit. Most of that money was generated by low-cost games and productivity apps. If Facebook enhances and helps develop Rift’s app store, I suspect it could quickly eclipse App Store sales (if not in the number of apps sold then definitely in the amount of revenue generated). The App Store models works so well for Apple that Microsoft (MSFT) copied it with the launch of its own app store in Windows 8. Droid has an App Store, Kindle’s got a store, xBox has a Marketplace, etc. A Rift app store would generate lots of cash, and, best of all, outsource the development of apps to others. If Rift apps catch on, Facebook’s $2 billion acquisition will look cheap in the years to come.

A stock’s ‘sex appeal’ plays big role in price

Investors greatly underestimate a stock’s ‘sex appeal’ when they’re trying to value a company. There are a handful of companies that have something special: a great niche at precisely the right point in history, a compelling story or a truly revolutionary idea. Those stocks don’t trade on reason and numbers alone. They trade on beliefs, ‘gut feelings’ and a desire for change in the world.

Last summer, a friend of mine asked me what I thought about investing in Tesla (TSLA). At the time, Tesla had shot up from $30 to north of $100. It was up more than 250 percent in the space of a few months. I told my friend we’d missed the boat. The stock had run too far too fast.

Boy was I wrong. Telsa has more than doubled since then. And that leads me to my thesis for this post: investors greatly underestimate a stock’s ‘sex appeal’ when they’re trying to value a company. There are a handful of companies that have something special: a great niche at precisely the right point in history, a compelling story or a truly revolutionary idea. Those stocks don’t trade on reason and numbers alone. They trade on beliefs, ‘gut feelings’ and a desire for change in the world. Put another way, they trade on hope, hype and hot air.

And yet, we can’t discount the power of a transformative company or CEO to grow into incredibly high expectations for a stock. The example I like to give is Amazon (AMZN). People complain about the valuation of a company like Facebook (FB), which is trading at a P/E of 92. But people aren’t that surprised Amazon’s trading at a P/E of 587!

And yet, Amazon is one of the few tech stocks that’s trading well above it’s dot-com highs from the late 1990s. 15 years ago, Amazon was just an online bookseller. Today, it’s a retail shopping giant, a media powerhouse for online movies, music and books, a hardware manufacturer, a cloud hosting company and a database of product reviews that’s unrivaled. Amazon has lived up to the hype.

Not every company lives up to the hype, of course, but you can’t deny that a few companies do. With that in mind, here’s my stab at a list of the Top 12 stocks with the biggest ‘sex appeal’ right now:

  1. Tesla (TSLA)
  2. Facebook (FB)
  3. Netflix (NFLX)
  4. Amazon (AMZN)
  5. Twitter (TWTR)
  6. Plug Power (PLUG)
  7. Pandora (P)
  8. RF Micro Devices (RFMD)
  9. Under Armour (UA)
  10. NQ Mobile Ads (NQ)
  11. 3D Systems (DDD)
  12. HEMP (HEMP)

I’m going to start blogging more about each of them regularly in the future so stay tuned!

Twitter (TWTR) closes below IPO price; it’s time for acquisitions!

Twitter needs rapidly-growing revenue to keep stockholders happy, and acquisitions are a great way to do that.

Twitter’s (TWTR) stock got hammered today along with a raft of other leading technology stocks. The blue bird’s in need some of some serious momentum, and I have a feeling Twitter’s CEO feels the same way. The usual pattern for a tech IPO goes like this:

1) Raise tons of cash.

2) Go on an acquisition spree.

3) Sell bonds or more stock to raise even more cash.

4) Buy more companies.

Facebook (FB) is in phase 2. The company’s rumored to be buying a drone company to spread internet access in Africa. They’re also buying virtual reality headset-maker Oculus Rift.

I have no doubt that Twitter’s going to follow suit. They need rapidly-growing revenue to keep stockholders happy, and acquisitions are a great way to do that. The company’s also just yanked it’s music app from iTunes. The speculation is they’ll bundle music streaming services in with their core app. I doubt that’ll bring in much revenue since they’re going up against titans like Pandora, Spotify and iTunes itself. My advice? Buy Spotify!