Bob Peck on Facebook-Oculus

Bob Peck (SunTrust) frames the discussion around Facebook’s $2 billion acquisition of development-stage virtual reality company Oculus as a question of whether:

a) you embrace the “Singularity” vision of science fiction writers whereby Man and Machine converge to become one.

or

b) you think recent deals are getting nuttier as there are almost no financials involved and “Total Addressable Market” or TAM-based valuations are ridiculous.

Here he breaks down the positives and negatives associated with last night’s deal:

The Potential Positives / Benefits Would Include: Facebook securing a dominant position in what could be a new paradigm in computing; FB acquires the market leader with a huge TAM; only spent < 1.5% of market cap with 83% in stock; and FB gets an asset that likely generates an ROI solely on the gaming opportunity. Looking at the sizing of the gaming market, we estimate the acquisition could be worth $3b (range $1-5b) as part of a new “non-console” cycle.

The Concerns / Potential Risks Include: Does owning Oculus immediately limit its TAM? Was valuation appropriate? Did FB need to own it / why not partner? Can FB execute against 2 large acquisitions (>$21b) simultaneously? Is shareholder capital being spent prudently with tangible long term ROIs. Will incremental margins decline with multiple acquisitions show few revenues? The time to market may be years out. Is Oculus in too nascent of a stage to be deemed a “winner?”

Peck maintains his $70 target on Facebook.

Source:

Oculus: “The Singularity” Opportunity vs. “Jumping the Shark”
SunTrust Robinson Humphrey – March 26th 2014