Updated from 8:49 a.m. to include thoughts from Wedbush analyst.
NEW YORK (TheStreet) -- Facebook (FB) last night announced that it's going to buy Oculus VR, maker of the virtual reality gaming system, Oculus Rift, for $2 billion in cash and stock. While the announcement came out of left field, Wall Street seems to like the deal even if some sell-side analysts don't quite know what it means.
In the press release announcing the deal, Facebook said the purchase price includes $400 million in cash and 23.1 million shares, valued at $1.6 billion. There's also a provision for an additional $300 million earn-out in cash and stock based on certain milestones. Facebook said it expects to close the deal in the second quarter of this year.
Oculus is best known for its' virtual reality headset, the Oculus Rift.
"While the applications for virtual reality technology beyond gaming are in their nascent stages, several industries are already experimenting with the technology, and Facebook plans to extend Oculus' existing advantage in gaming to new verticals, including communications, media and entertainment, education and other areas," the company said in the release. "Given these broad potential applications, virtual reality technology is a strong candidate to emerge as the next social and communications platform."
"Mobile is the platform of today, and now we're also getting ready for the platforms of tomorrow," said Facebook founder and CEO, Mark Zuckerberg in the press release. "Oculus has the chance to create the most social platform ever, and change the way we work, play and communicate."
On the conference call discussing the purchase, Zuckerberg and CFO David Ebersman said the $2 billion purchase price is based largely on the opportunities in the gaming market, but if the platform takes off, Oculus could be worth multiples of what Facebook paid for it.
Shares of Facebook were down sharply in Wednesday trading, off 6.1% to $60.93.
In terms of valuation, games business is what FB used for valuation, based on projections. If platform goes elsewhere, then tech worth mult.Chris Ciaccia (@Chris_Ciaccia) March 25, 2014
Zuckerberg, 29, also touched on Facebook's recent acquisition spree, buying Instagram in 2012 for roughly $730 million in cash and stock, and then acquiring WhatsApp last month. The Facebook CEO said these companies are rare, and the fact that they've been bought so close to one another is more coincidental than anything.
"I think the key thing to keep in mind on this is these are all incredibly rare companies, right? So we'll go a long period of time without doing anything like this and then I think we're in this kind of rare period now where we've just done two really close to each other," Zuckerberg said on the call. "So I definitely don't think you should expect us to make multiple multi-billion dollar acquisitions within a couple of months frequently."
Facebook CFO Ebersman noted that the social networking giant, which now has more than 1 billion monthly active users on mobile, has been selective in its M&A strategy, and will continue to be so over the life of the company.
Following the conference call, Wall Street was by and large positive on the deal, especially down the line, as Facebook seeks to own the next major computing platform. Here's what a few on Wall Street, including TheStreet's Jim Cramer, had to say.
"We see a few positives to the deal. First, we like the fact that the company is not sitting idle and using its strong stock as currency to fund future growth. We only wish Apple would do the same. Second, this is the second acquisition this quarter and shows the business confidence that the management has currently. Third, it is building off of the strong momentum it has in mobile and now is focused on the next-generation technology area of growth the virtual experience. And fourth, it gets the technology talent that will be necessary to build out this new platform. It's a very competitive space with Sony, Microsoft, Google and possibly Apple getting involved."
UBS analyst Eric Sheridan (Buy, $90 PT)
"While the Oculus Rift was initially conceived as a gaming device, both Facebook and Oculus believe there are applications for this technology in other verticals, including communications, media/entertainment & education. While Oculus will continue to operate independently within FB in pursuit of the gaming opportunity, the company plans to leverage FB's recruiting & marketing capabilities, infrastructure, and developer relationships. Longer term, FB believes VR will succeed mobile as a mainstream computing platform, perhaps becoming "the most social platform ever." By investing in Oculus, FB hopes to establish a leadership role in shaping this evolution. That said, FB believes it can justify the cost of the acquisition on the gaming opportunity alone."
Stifel Nicolaus analyst Jordan Rohan (Buy, $82 PT)
"FB announced the acquisition of Oculus VR, the maker of next generation virtual reality gaming headsets, for $2bn in cash and stock. While we are not familiar with the company, the consumer gaming industry has become enthralled with the idea of immersive social and gaming experiences. This is another experimental multi-billion dollar platform acquisition for FB, coming on the heels of the $19bn deal for WhatsApp. Our take: in order for Facebook to feel comfortable being this aggressive/bold/speculative, the growth of its core advertising platform must be extraordinarily strong. Our channel checks already reflect that view. Reiterate Buy with $82 target"
Pacific Crest Securities analyst Evan Wilson (Sector Perform, No PT)
"We agree that Oculus Rift could make virtual reality a commercial success for the first time. We think that over time the headsets could replace other displays such as televisions, PC monitors and projectors, especially for high-end uses such as movies and games. However, we do not see VR as a platform any more than televisions, PC monitors or projectors are today. It is more likely that the computing platform (PC, smartphone, tablet, laptop) and its software will continue to be the platform, which will allow multiple VR display manufacturers to interoperate and compete."
Piper Jaffray analyst Gene Munster (Overweight, $67 PT)
"Facebook announced that it would acquire virtual reality headset company Oculus VR. We view the Oculus acquisition as important because of the three major acquisitions it has made (Instagram, WhatsApp, Oculus VR), Oculus appears to be the first that is offensive, or at least not defensive. We believe that Facebook intends to participate meaningfully in the development and future of wearable computers, particularly around vision. While management stated that investors should not expect major acquisitions like WhatsApp and Oculus, we believe Facebook will begin to make more consistent bigger bets on future technologies more similar to Google over time."
Wedbush Securities analyst Shyam Patel (Outperform, $80 PT)
"Historically there has been a major shift in computing platforms every 10-15 years and we believe it is possible for the next shift to be toward vision and virtual reality. We would point out that Google Glass appears to be a similar attempt from Google and at least partially helps support Facebook's long-term computing thesis. Facebook believes that Oculus has developed the most advanced virtual reality technology and has hired the top talent in the space. Oculus currently sells development kits (virtual reality headsets) for gaming. However, management pointed out several possible future applications for the technology, including watching sporting events, interacting in classrooms, medical consulting, and shopping in virtual stores."
--Written by Chris Ciaccia in New York
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