There have been many noteworthy developments in the technology space recently. Some of these will likely have a material impact on the companies in the sector and the markets they serve.
Virtual Reality Takes Center Stage
There have been a couple of important developments in the field of virtual reality in recent weeks. Sony (SNE) has announced that it is working on a virtual reality device that will have a head-mounted display. It will offer resolution of 1080p and have a 90 degree field of view. At this point, it remains a work in progress and is only referred to as “Project Morpheus”. Sony has yet to announce when it will debut, or what it will cost. Meanwhile, Facebook (FB) has agreed to acquire Oculus Rift, a leader in immersive virtual reality technology, for roughly $2 billion. This includes $400 million in cash and 23.1 million shares of Facebook common stock (valued at $1.6 billion based on an average closing price of $69.35 in the 20 days preceding March 21st). The deal is expected to close in the second quarter, and also provides for an additional $300 million earnouts in cash and stock based on the achievement of certain milestones. Facebook plans to extend Oculus Rift’s advantage in gaming to new areas, including communications, media and entertainment, and education. Facebook believes that virtual reality could emerge as an important social and communications platform in the coming years, and is investing accordingly.
Microsoft’s New Direction
Satya Nadella is the new chief executive officer for Microsoft (MSFT - Free Microsoft Stock Report). Mr. Nadella took the helm in early February. He has over 20 years of experience at Microsoft, and had most recently served as executive vice president of the company’s Cloud and Enterprise group.
For his first product unveiling as CEO, Mr. Nadella introduced a version of Microsoft Office for Apple’s (AAPL) iPad. The addition of this new revenue stream could prove lucrative for Microsoft, and the news has been well received by Wall Street. In addition, Mr. Nadella announced Microsoft’s Enterprise Mobility Suite, an access portal governing various parts of enterprise infrastructure development. It allows for identity management, access, and device management across all devices and applications. These developments appear to reflect a policy shift to greater focus on expanding the footprint of its software across the Web, and on smartphones and tablet computers. Microsoft will emphasize efforts to bring cloud applications to any device or operating system going forward.
King Digital Entertainment Makes its Debut
Social games company King Digital Entertainment Plc. (KING) has recently completed its initial public offering. The company is the maker of the popular smartphone game Candy Crush Saga. Priced at $22.50 per share, the IPO valued the company at roughly $7.1 billion. Roughly $500 million was raised, through the sale of 22.2 million shares. Thus far, the offering has not been well received by the market. The stock declined about 16% on its opening day, and is currently around 18% below the $22.50 mark, where it debuted.
The lackluster showing probably reflects an important investor concern, in our view. The company’s revenue increased from $164.4 million in 2012 to almost $1.9 billion in 2013; earnings advanced from $7.8 million in 2012 to just under $568 million in 2013. Based on the 2013 figures, the stock’s current valuation appears reasonable. However, a small number of games generate the substantial majority of revenue here. In the fourth quarter of 2013, the company’s top three games (Candy Crush Saga, Pet Rescue Saga, and Farm Heroes Saga) accounted for 95% of total gross bookings. Candy Crush Saga itself accounted for 78% of total gross bookings. Clearly, results here depend on the performance of a small number of social games. While the titles have proven popular in the past, there can be no assurance this will continue to be the case in the future. In the coming years, growth will depend on the company’s ability to develop new games and enhance existing titles, and how well these efforts are received by the marketplace.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.