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Facebook's Oculus Acquires RakNet

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Oculus VR seems to be on an acquisition spree, right before joining Facebook (FB), with two acquisitions in a span of just about three weeks. After agreeing to buy Carbon Design Group that had worked on Microsoft Corp.’s (MSFT) Xbox360 Controller, Oculus recently acquired software startup, RakNet for an undisclosed amount.

RakNet develops a game-networking engine, which is open source in nature. This open source feature, in turn enables other developers to see it, add to it as well as use it for free. Some of its renowned customers include Unity, Havok and Sony Online Entertainment.

Earlier in March, 2014, Facebook signed an agreement to buy Oculus for a sum of $2.0 billion. This acquisition is expected to close in the second half of 2014.

Per CEO Mark Zuckerberg, virtual reality is the most promising form of social computing following mobile phones. Oculus intends to enable people to experience events together instead of individuals playing games separately and we believe that RakNet will help Oculus in achieving it.

Facebook’s move into the emerging virtual reality market, which is a bold step in our view, is projected to bear fruit over the next 5 to 10 years. If Oculus’ technology succeeds in gaining mass adoption, it will help Facebook dominate the virtual reality market in the long run.

We believe that the successive acquisitions will enable Oculus to add new features to its virtual reality headsets that will help it to gain mass adoption. It will also help Facebook to extend the virtual reality concept in other industries such as communications, media and entertainment and education

Facebook will enjoy a first mover’s advantage much similar to what Apple (AAPL) enjoyed in the smartphone market during 2007-2012. Moreover, the company’s strategy of acquiring next-generation technology strengthens its software developer talent base. This is significant as Facebook expects to focus on delivering Oculus technology as software and services rather than hardware.

However, Facebook’s frantic pace of acquisitions and their long-term growth prospects are major concerns for investors. In order to calm investors’ nerves, we believe Facebook needs to maintain its ad revenue growth momentum, particularly in the mobile segment over the next couple of years.

However, this may become difficult as the company continues to face intensifying competition from Google and Twitter (TWTR) in the ad market.   Moreover, Oculus will face competition from Sony’s Project Morpheus in the virtual reality market over the long term.

Nevertheless, Facebook’s growing mobile user base (more than 1 billion), Instagram’s increasing popularity (200 million users) and the new initiatives such as Internet.org will continue to boost Facebook’s share price in the near term.

Currently, Facebook has a Zacks Rank # 3 (Hold).

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