Companies have been fighting to keep us entertained for many years, evolving from radio to television, movies, and gaming. The "metaverse" is the newest chapter in entertainment, and its growing popularity means investors should at least be familiar with it. Here is why the metaverse matters and three stocks that are poised to benefit from it.
What is the metaverse?
The metaverse is where the physical and digital worlds come together. Think of the physical world we live in and the digital world we access through the internet. Technology has progressed, and how people interact has become more digital over time.
The digital world has evolved, from basic online connections such as email and instant messenger to social media and large online gaming communities such as Fortnite and Minecraft.
Until recently, the internet and gaming have been separate from the physical world; you would log on to access them. With the gradual advancement of virtual and augmented reality and improved connectivity of 5G, the ingredients are there for the next advancement of how we interact. The digital world begins to overlap with the physical world.
It's still unclear what the metaverse will look like, but it could be huge. According to research firm Strategy Analytics, the global metaverse could be worth $280 billion 2025 and will likely continue to grow from there.
Unity Software (NYSE:U) operates one of two primary 3D engines, along with Epic Games, the creator of Fortnite. Together, these two companies form a duopoly on 3D creation.
Unity is used by 94 of the top 100 game development studios by revenue, and its platform touches 2.7 billion active end users. Unity is best thought of as the "pick and shovel," the infrastructure that will be used by a lot of creators to build out the virtual landscape of the metaverse.
Unity's revenue grew 41% year over year in the first quarter of 2021, and management is guiding for 31% growth and $1 billion in total revenue for the full year. Unity's potential goes beyond gaming; the platform is being used in industrial applications, automotive, film, animation, engineering, and more.
Customers spend 40% more each year after using Unity, so the company could continue rapidly growing revenue as its software is used in more and more industries.
Roblox (NYSE:RBLX) is an online entertainment platform where creators can develop games and experiences, and users can participate in them. Roblox operates as its own economy, complete with its own currency (Robux) that creators and users transact with.
For now, Roblox comes the closest of arguably any public company to emulating the metaverse concept. Users can interact and socialize on Roblox and enjoy custom-built experiences, such as when Roblox partnered with Walt Disney for a Star Wars project in 2019 or when musical artist Lil Nas X did a live concert on Roblox in 2020.
Roblox's prime user base is children and has seen a huge boost in growth during the pandemic. In Q1, revenue grew 140% year over year, and the company is expected to grow revenue 169% to $2.47 billion in 2021 while posting earnings per share of $0.79.
It remains to be seen if Roblox can expand its user base to older demographics, which could be a long-term hurdle for the company if it's unable to do so.
Aside from its popular social media platforms, Facebook (NASDAQ:FB) is also a major player in augmented (AR) and virtual reality (VR) with its ownership of Oculus.
CEO and founder Mark Zuckerberg is one of the most well-known executives in America, and has already proclaimed that Facebook will transition to being a "metaverse company" over the next five years, a move that signals the mix of Facebook's social network and its ambitions in AR and VR.
Facebook is the largest and most mature company of this group, and is a cash cow. It generated $7.8 billion in free cash flow in 2021 Q1, more than the revenue Unity and Roblox will generate all of this year -- combined.
Zuckerberg is assembling an executive team to work on Facebook's metaverse agenda. It will be revealed over time whether Mark's vision will come to be, but if one thing is for certain, Facebook has the resources to make that vision a reality.
Here's the bottom line
The metaverse is an exciting concept that is still in its early innings. Investors could benefit from getting broad exposure to these three companies. It will be difficult to know who the big "winners" and "losers" will be until years from now, but these companies have a good shot at being in the mix due to their diversity.