Investors in Chinese stock have another reason to smile. Thanks to extraordinary innovations from companies such as Intel Corporation (NASDAQ:INTC) and Microsoft Corporation (NASDAQ:MSFT), we often assume we’re at the forefront of augmented reality and virtual reality. However, the China AR/VR market is a much more robust environment.
Before we dive into the details, let’s define what we mean by augmented and virtual reality. Though sometimes used interchangeably, AR refers to digital elements incorporated into a device’s live view. Snap Inc’s (NYSE:SNAP) Lenses platform is an example of how AR can be utilized to digitally alter your appearance in real time.
In contrast, VR platforms often “enclose” the end-user in a completely digitalized environment. VR is what you typically think about when discussing artificial reality; that is, giant headsets featuring people grabbing at imaginary objects. Facebook, Inc.’s (NASDAQ:FB) Oculus Rift offers the most common example.
The term mixed reality, as you might guess, combines AR and VR elements. This is the next generation in artificially-generated environments, where users can manipulate augmented elements in real time. Microsoft’s impressive HoloLens is one of the early pioneers in the mixed reality space.
Clearly, the market for digitalized ecosystems is exploding. Last year, virtual reality companies worldwide sold fewer than 10 million AR and VR headset units combined. By the end of this year, the figure will tick up to 12.4 million units.
However, by the year 2021, industry experts predict that global unit-sales will hit over 59 million. That’s well over a 500% increase from last year’s haul. At this projected rate, sales may not peak until at least the mid-2020s.
Naturally, many traders have zeroed-in on Chinese stock investments. With such a large population, the China AR/VR market will be huge. But it’s so much more than mere numbers.
Social Acceptance Drives China AR/VR market
In terms of per-capita wealth relative to total population size, we’re still the alpha dog. According to the Central Intelligence Agency, in absolute terms, the U.S. ranks 20th in per-capita gross domestic product at $59,500. China, in comparison, is ranked 106th at $16,600.
Thus, virtual reality companies have assumed that American consumers are more able to afford their products at a wider scale. This should remain true for the next several years. That said, the China AR/VR market has one critical advantage that it already levers: Chinese consumers have a ravenous appetite for artificially-generated reality platforms.
While western nations are carefully plotting through their digital journey, China’s virtual reality companies have thrown caution to the wind. For example, the Asian juggernaut recently launched its first VR theme park called “Oriental Science Fiction Valley.” The property encompasses 330 acres and provides 35 different VR attractions.
More importantly, Chinese stock investments will benefit from VR’s cultural acceptance. Americans in general have had a tough time adapting to people zoning-out with their VR headsets. We don’t want to add distracted sitting or standing to the list of problems on our roadways and sidewalks. However, the Chinese have seemingly embraced VR products as status symbols.
Therefore, it’s no surprise that the most popular Chinese stock names — Alibaba Group Holding Ltd (NYSE:BABA), Baidu Inc (ADR) (NASDAQ:BIDU), and Tencent Holdings Ltd (OTCMKTS:TCTZF) — have made substantive investments in virtual reality.
Most critically, President Xi Jinping includes developing the China AR/VR market in the nation’s “Five Year Plan.” Furthermore, we’re seeing a push for Chinese virtual reality companies in creating English-language content. Possibly, China, not the U.S., will take the lead in artificially-generated environments.
Buy ‘Virtual’ Chinese Stock for Real Profits?
Admittedly, the figures and forecasts are remarkable. But before you pick out your favorite Chinese stock to buy, I’ll offer some cautionary words.
For starters, if you’re looking for a pure play in the China AR/VR market, you’re not going to find it. Even stateside, we’re mostly limited to consumer-tech firms that have a VR business. Essentially, when you buy a Chinese stock, you’re exposing yourself to other elements besides the target sector.
Second, virtual reality companies don’t guarantee a pathway to profitability. In October of last year, CNBC’s Todd Haselton declared that Facebook’s Oculus Rift acquisition was a rare mistake. And while China doubled-down on VR, it did so in the way President Trump uses the term.
In other words, the China AR/VR market fizzled against inflated forecasts.
While we’re talking about Trump, his administration has aggressively targeted China’s economic policies. This is a big negative for the China AR/VR sector as it lags behind the U.S. in certain areas. The current geopolitical environment will make international cooperation more difficult. By this, I mean China must find new ways to steal our technology.
Overall, I have a conservative view on buying a Chinese stock in the virtual reality segment. The nation’s impetus should be applauded. However, it remains to be seen whether the China AR/VR market can expand beyond its affluent class.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
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