Get ready for the metaverse.
Virtual reality (VR) has long been a staple of science fiction novels and movies. A "place" that seeks to blend the real world and a digital world into one. Thanks to leaps in VR technology and computing power, fiction is becoming fact – creating demand not only in this space, but also for metaverse stocks.
The metaverse has plenty of potential to be as big as the internet. At least that's the idea.
At its core, it's a realm that would function like the internet we're used to, but one in which our avatars could move through and participate in. Moreover, it would have an economy unto itself.
And a host of companies are seeking to make the metaverse happen. For example, Epic Games, through its popular Fortnite game, hosts virtual concerts, including one in early August with Ariana Grande. And payments firm Visa (V) recently bought a non-fungible token (NFT) in order to help it better understand the digital commerce world.
So, there's plenty of potential from an investor point of view when it comes to metaverse stocks. In fact, Bloomberg Intelligence estimates that the market size for metaverse could reach $800 billion by 2024.
Below, we highlight six metaverse stocks and one exchange-traded fund (ETF) that could be big winners in this next wave of technology.
Data is as of Sept. 30.
- Metaverse sector: Infrastructure
- Market value: $4.8 billion
Cloud computing and decentralization has created a slight problem: latency, or data lag. Users experience this all the time, clicking a link on their internet browser and waiting for the next page to download or process to happen. The issue is the distance the data needs to travel, which isn't such a big deal if they're looking up the weather. But if they're in a self-driving car or doing robotic surgery, the data lag can be more than just a headache.
That's where edge computing and technology company Fastly (FSLY) comes into place.
FSLY operates an edge computing infrastructure-as-a-service (IaaS) platform that brings servers and other equipment to the source of data creation. Fastly's platform can move 145 terabytes worth of data per second across 28 countries. Basically, it helps reduce the lag time and latency of decentralization.
Companies seem to like the firm's offerings. Revenue growth at Fastly has been swift since its launch about a decade ago, with revenues growing 14% year-over-year in the last quarter.
Like cloud computing, the metaverse will need plenty of edge computing solutions to make it happen. Think about the sheer amount of data transfer needed to create a virtual world in real time that users will be able to interact with. Without edge computing and companies like Fastly, these sorts of transactions simply can't function.
In addition to its prospects as a metaverse stock, FSLY also makes an interesting growth play on the continued expansion of cloud computing. And with a recent tech-wreck induced drop to shares, Fastly is cheaper than it has been in a long while.
- Metaverse sector: Infrastructure
- Market value: $516.2 billion
Nvidia (NVDA) has frequently been touted as one of the best semiconductor stocks to buy for the long haul. Not shockingly, its foray into the worlds of artificial intelligence (AI) and other fast-processing chips make it a powerful player in the world of the metaverse stocks.
NVDA's chipsets are already finding their way into a variety of servers and other centralized computers needed to run complex calculations. That includes edge computing platforms run by firms like Fastly. With this leadership position and the need to move with speed, Nvidia is almost guaranteed to be a top winner from the metaverse revolution.
And another reason its future looks even better: its pending buyout of ARM Holdings from SoftBank Group (SFTBY). ARM is a major player in patents and software that allow chips to be implemented into computer systems. With the buyout, NVDA will be able to build out its end-to-end ecosystem. In other words, it can place its graphics processing unit (GPU) and advanced chips into more systems directly and boost computing power. And the metaverse will need this kind of computing power to work.
And while its roughly $40 billion buyout of ARM is anything but assured – with U.K. regulators among the most recent to raise antitrust concerns – NVDA is still a potential winner from the metaverse. After all, its chips continue to become the standard with regards to high-speed calculations and computing.
- Metaverse sector: Virtual platform
- Market value: $43.5 billion
A video game seems like an odd choice for fashion house Gucci to launch an exclusive event, but it goes to show the pending power of the metaverse and how Roblox (RBLX) is building this future.
On the surface, RBLX is a video game. A very popular one at that. The company has 43.2 million daily active users who logged 9.7 billion hours of engagement in the second quarter.
The thing is, it's not really a single game. Roblox uses outside developers to build various games, content and other entertainment for its users. The firm makes money by selling its virtual currency that players can use to access these games, experiences, content and even virtual clothing – like a Gucci bag – for their characters.
The reality is, Roblox has already created the base for the metaverse within its game. And it's expanding that further.
In the company's recent earnings call with analysts, Roblox CEO Dave Baszucki mentioned that the firm's platform "welcomes six-year olds and, at the same time, welcomes 30-year olds." Ultimately, Roblox sees its platform as a virtual place where these immersive experiences, like concerts, are "going on all the time, just as play is going on all the time right now," Baszucki said.
To make this happen, RBLX is spending some big bucks on talent and acquisitions to build out its version of the metaverse. A prime example is its recent purchase of Guilded, a platform designed to connect various gaming communities.
As for the company itself, Roblox continues to see increasing revenues from its platform and business model. For its latest quarter, the firm realized a whopping 126% year-over-year jump in sales. This follows a 140% year-over-year revenue increase in the first quarter.
Given its leadership position in the foundations of this next wave of technology, this metaverse stock could be a powerful choice for portfolios.
- Metaverse sector: Hardware and apps
- Market value: $956.9 billion
Mark Zuckerberg and Facebook (FB) set the stage for the firm's metaverse vision back in 2014, when the company purchased VR start-up Oculus. On the whole, FB has had a hard time with the division in terms of its social media operations and it always seemed like a fad business for the firm. But Zuckerberg may finally be getting the last laugh.
In August, FB launched a public version of a new Oculus app called Horizon Workrooms. Using the firm's VR headsets, users are able to participate in meetings via avatars. They can see their computer screens, keyboards and even participate on virtual whiteboards.
"In the future, working together will be one of the main ways people use the metaverse," Zuckerberg wrote in a recent blog post. And Facebook looks to be one of the first to bring such tools to the market. Given the recent surge in work-from-home arrangements due to COVID-19, this certainly could be a major win for Facebook in the near term.
The longer term could be rosy, as well.
FB is already a collection of communities via its various apps and communications platforms, so the metaverse makes plenty of sense for the company to pivot to.
Over the longer haul, this could bring a secondary stream of advertising revenue or fees for content creators within its platform and system. That's a long way off, but given the metaverse stock's leadership position in hardware and current first-mover status in apps designed for work, Facebook could get there earlier than others.
Better still, FB represents a safe play on the growth of the metaverse. There's no denying the firm's profitability or cash flow generation. That could give conservative investors peace of mind as they look toward the theme.
- Metaverse sector: Software
- Market value: $62.7 billion
Autodesk (ADSK) went public back in the 1980s and is best known for its pioneering AutoCAD software. This application allows engineers, architects, designers and academics to virtually design and create buildings, products, infrastructure projects and more in both 2D and 3D. It's the standard software for the industry and the bulk of construction projects touch the software at some point during their lifecycle.
That software is still the firm's bread and butter, helping it realize more than $1 billion in sales during the second quarter of this year alone.
Where it gets interesting for ADSK is that developers have started using its software to design and build virtual worlds for gaming and entertainment. The firm now offers a suite of products designed to render 3D animation, construct and launch virtual buildings, and create within VR and augmented reality (AR) spaces. Revenues from this segment (M&E) were up 10% year-over-year in the latest quarter.
Autodesk is a natural fit and quickly becoming the top-choice for developers looking at the metaverse and its construction.
Perhaps the best part in all of this is that Autodesk has continued to pivot towards a lucrative software-as-a-service (SaaS) model, with recurring revenues accounting for 98% of total sales in the most recent quarter. Those recurring revenues have translated into plenty of profits, as well. Earnings surged 23.5% in the second quarter with ADSK producing $186 million in free cash flow (the cash remaining after a company has paid its expenses, interest on debt, taxes and long-term investments to grow its business).
With a long history of 3D design behind it, Autodesk makes a top choice for investors looking at metaverse stocks.
- Metaverse sector: Payment services
- Market value: $168.2 billion
A key aspect of the metaverse is that creators want to have a robust economy within its virtual walls. Digitalization of assets, currency and the ability for content creators to get paid is a must. That's where e-commerce specialist Shopify (SHOP) comes in.
We all know about SHOP as the firm that lets small business owners launch websites and conduct business online. Since its humble origins, Shopify has expanded its toolset and offerings to include a number of tangential products necessary for small businesses to thrive.
And now it's doing so with the digital and metaverse economy.
Shopify made two big moves this year that tie into the potential for metaverse commerce. One is the acquisition of AR app Primer. Here, users can see firsthand the effects of a purchase or project in their space. For the metaverse, it gives SHOP a powerful tool that subscribers can use to build-out potential stores or shopping experiences in the digital world.
The second is the launch of a new NFT platform that will allow digital creators to sell art and other content directly to consumers. The Chicago Bulls were the first to test the offering, launching limited NFTs of the basketball team's 1991 championship rings.
The two efforts set-up Shopify quite nicely to plug into the metaverse and give it a foothold into the potential commerce aspirations of this virtual world.
As these future aspirations play out, SHOP is still doing what it does best – designing e-commerce solutions for businesses. And as the leading provider of such software and apps, there's plenty of safety with shares of this metaverse stock.
Roundhill Ball Metaverse ETF
- Assets under management: $104.6 million
- Expenses: 0.75%, or $75 annually for every $10,000 invested
Given the buzzwordy nature of the metaverse, it's not too surprising that there's already an ETF tracking the initiative. In this case, it's the Roundhill Ball Metaverse ETF (META). And truth be told, it might be the best way for investors to play the concept and birth of the virtual world.
META was developed by futurist and venture capitalist Matthew Ball among others to fully represent the entire spectrum of metaverse. From infrastructure and interface to content development and experience, META holds them all. Fifty different stocks in fact.
Cloud solutions, gaming platforms and computing components stocks make up the vast bulk of the ETF's holdings, at nearly 70% of total. Top individual holdings include Nvidia, Microsoft (MSFT) and China's gaming giant Tencent (TCEHY).
Now, there are some caveats when it comes to META.
For one thing, it's new. Like just-took-the-wrapper-off new. The ETF only launched at the end of June. Generally, it's a good idea to wait a bit for a new fund to gather assets and trading volume before taking the plunge. This is especially true when it comes to thematic and specialized funds.
With that said, the ETF has already gathered more than $100 million in assets. Volume has started to pick up, too, with META's 30-day average daily volume around 250,000 shares.
Secondly, investors should be aware of its cost. Right now, META is charging 0.75% in annual expenses. That's a bit on the high side, even for a specialized fund. As a point of comparison, the very similar metaverse-styled iShares Virtual Work and Life Multisector ETF (IWFH) charges only 0.47% in expenses.
With those two caveats in mind, META may still be a good choice for investors looking to cash in on metaverse stocks from a broader stance.
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