The coronavirus pandemic has been one of the great disrupters of this century. It has thrown the usual order of life and business up in the air, letting the pieces fall in completely unpredictable ways. While many corners of the market have been hit hard and investor confidence has tumbled, a diverse basket of industries have benefited enormously from the crisis. Virtual and augmented reality is one such industry that has seen a big uptick in momentum and companies like Zadar Ventures (TSX: ZAD) are set to benefit. The company made a good move when it recently acquired all outstanding shares of extended reality firm XRApplied, their stock price has been on a steady rise since March.
For the investor looking to capitalize on the current state of the markets, stocks like Zadar have a lot of promise for the future. As the crisis endures and the changing landscape of products and services on which we depend starts to take form, many companies who are currently offering the right things at the right time stand to do quite well in the years to come.
Portfolio diversification as important as ever
It is important that investors not get too carried away by the hype that surrounds some industries at the moment. As is the case in more normal times, diversification remains an important aspect of an intelligently selected portfolio of assets.
One of the positive aspects of the current situation for the investor seeking diversity is the sheer breadth of industries that are benefiting from the health crisis. Gold and gold mining have been doing exceptionally well, as have other industries as diverse as video games and home exercise equipment. This is good news for investors looking for positive exposure to the health crisis without heavily concentrating their portfolio into one industry vertical.
Simple diversification across industries can either neutralize gains or create overexposure to COVID-19 risk
True diversification, however, requires spreading investments across more than just a random assortment of industries. Although it’s tempting to concentrate on stocks doing well during the current crisis, over-reliance on the momentum generated by the pandemic can itself be problematic. If the crisis situation doesn’t continue to devolve—if a vaccine is found, or a critical mass of immunity is achieved quicker than expected—then the current pessimistic expectations built into current stock prices will dissipate overnight.
This would lead to a rapid reversal in price momentum. Companies currently languishing will see their prices rise, while others, like video conferencing players, will see a sharp drop off in price as more workers return to the office. For the investor diversified across industries but still concentrated in stocks whose success relies on an enduring health crisis, this could be disastrous. Clearly, as is the case for investing in more normal times, diversification needs to take into consideration the overall impact that a broad upheaval of the current dominant forces at play in the markets would have.
However, any consideration for diversification also needs to also take into account the possibility of over-diluting exposure. At the extreme end of the spectrum, hedging against COVID-19 exposure through investments in both videoconferencing and airline stocks, for example, would lead to neutralization of market reactions to developments in the COVID crisis. This may be undesirable for the investor seeking to do more than merely track broad indexes.
For those who want to take advantage of the momentum that COVID-19 has given to some sectors in the markets, the key to diversification is to find stocks in industries that were already booming before the pandemic.
XRApplied: the ideal mix of diversification and exposure at once
XRApplied is a curiously positioned company. Being a player in the Virtual and Augmented reality market, the current trend towards telecommuting, video gaming and at-home travel experiences—to name but a few extended reality applications—puts them in a strong position to benefit from coronavirus disruptions. These applications will be increasingly in hot demand if the crisis endures.
However, the extended reality market was already taking off prior to the outbreak of COVID-19, and some of the more promising applications were in industries that have suffered as a result of the health crisis. This builds an element of diversification into XRApplieds business, as a turnaround in the health crisis would only see demand for other applications for their technology pick up again.
This puts XRApplied in a unique position as one of the few companies that are able to exploit explosive growth on either side of the crisis.
XRApplied’s key asset is their Software Development Kit
One of the key strengths XRApplied has is its unique intellectual property allowing rapid development of varied extended reality applications. A highlight is their Software Development Kit which provides the bulk of the underlying technology required in any extended reality application.
What this means is that instead of being tied into specific applications like video conferencing or games as other industry players might, they’re able to rapidly implement solutions in any field by building off their base of underlying technologies. The same technology used to animate, for example, avatars used in video-conferencing can also be rapidly redeployed into something as disparate as simulating a press conference for the purposes of training public relations officers in public speaking.
The great advantage XRApplied is afforded here is that demand for their technology is primarily driven by the benefits of rapid development they provide to the broader extended reality industry as a whole. Awareness of their intellectual property alone is enough to see them profiting on both sides of the crisis.
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(Featured image by Edwin Hooper via Unsplash)
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