Is HTC Corp Becoming a Virtual Reality Stock?

This past Christmas, we splashed out on an Oculus virtual reality headset for the fam and when we finally got to experience virtual reality, it was seriously mind blowing. While content for VR headsets is being developed rather slowly and the whole thing feels a bit buggy, we came away from that experience convinced that in the not-so-distant future, kids will ask their parents if they really used to play video games through the small windows of televisions. While we can’t be certain what the future will bring, we are certain VR is here to stay and we’re interested in looking at investment opportunities in this space. As with any emerging technology, we’re not expecting to find a pure-play virtual reality stock but it doesn’t hurt to look.

The two dominant headsets at the moment are the Oculus Rift…

…and the HTC Vive.

Oculus is owned by Facebook, a $376 billion company that is in the business of keeping people connected and largely wasting their time. HTC Corp (TPE:2498) is a little known Taiwanese company with a $2 billion market cap and a stock price chart that looks like this:

So over the past 5 years, HTC stock has lost -83% of its value and appears to have experienced no hype whatsoever relating to its move into virtual reality with their “Vive Headset”. Is there an opportunity here that everyone is missing?

The first thing to note is that HTC Corp trades on the Taiwan stock exchange which is not that accessible to foreign investors. Sure, if you have an account with Interactive Brokers you’ll probably be able to buy shares in HTC but you’ll first have to buy Taiwanese dollars and there will probably be exchange fees. In short, if you’re an average retail investor wanting to buy this stock, it’s going to be a pain in the a33. Could that inaccessibility mean that we have a sleeping tiger here which is ready to explode with the next surprise earnings report due to strong sales of the HTC Vive? That’s what we need to find out.

Since their inception in 1997, HTC has been at the forefront of innovation. They developed the world’s first Android smartphone. In the year 2000, they debuted one of the first touch screen smartphones in the world. In 2010, they sold the world’s first 4-G capable phone in the United States. Then everything fell apart and in October of 2013, a declining share of the smartphone market led to their first quarterly loss ever. Since then, they’ve been trying to innovate their way back into profitability and shareholders are hoping the Vive can help take things over the top.

We’re working with very limited information here so the first thing we want to look at is current revenues. As it turns out, HTC reports their revenues every month and spits them out into the handy chart seen below:

Don’t pay too much attention to the actual numbers as they’re in Taiwan dollars, just pay attention to the trends. We do see a clear upward trend but this doesn’t mean a whole lot unless we know where those revenues are coming from.

An article by Road to VR states that in their most recent Q3 earnings presentation, HTC stated they had sold “much more than 140,000” headsets and that they sold these at a profit. Let’s assume that “much more” means double that and round it off at 300,000 VR headsets sold so far. The HTC Vive is selling at a price point of $799.99 so back-of-the-napkin math puts their revenues at around $240 million. Here’s what revenues and profitability have looked like for each of the past 5 quarters:

Again, since the numbers above are expressed in Taiwan dollars you’re just looking at the trends here. Q3 revenues of 22.2 billion TWD translates into about $700 million USD in revenues. With our estimates of $240 million coming in from sales of the HTC Vive, it’s very reasonable to think that sales of VR headsets can move the needle here.

HTC doesn’t provide a great deal of granularity into where these revenues are coming from. We would hope that over Christmas they sold a few more VR headsets than normal, though their December 2016 monthly revenue doesn’t appear to show anything out of the norm. Having a track record of being first to market with leading technology phones and then losing out to the likes of Samsung and Apple makes us wonder if their competitors simply learn from HTC’s mistakes before launching their own superior products.

One thing is for sure. If you’re wanting to take a punt on shares of HTC in hopes that the Vive will turn the company into a pure-play virtual reality stock, now’s the time to start accumulating. Just remember that you’re going to be taking on some currency risk with the Taiwan dollar and the foreign exchange transaction fees can be quite steep. That might mean that dollar cost averaging is off the table and you’ll have to make your entire purchase at one go which will incur additional market timing risk.

Here at Nanalyze, we hold the lion's share of our investing dollars in a portfolio of 30 dividend growth stocks. Find out which ones in the Quantigence report freely available to Nanalyze subscribers.

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