Revenue from the metaverse, or virtual interactive worlds, is estimated to more than double to $400 billion by 2025, according to Grayscale Research. Experts believe these 3D environments represent the next step in social media's development and could fundamentally shape how people shop and play games in the future, among other things.
The metaverse is going to require lots of processing power and sophisticated software to create 3D content, especially if it is ever going to reach the capability of simulating real-world environments, as some experts predict. Here's why Nvidia (NVDA 0.76%), Unity Software (U -1.22%), and Roblox (RBLX -2.25%) are three no-brainer stocks to consider buying today that could benefit from growing interest in the metaverse.
Image source: Getty Images.
1. Nvidia
Nvidia is the leading supplier of graphics processing units (GPUs) and sells its chips to a range of customers in gaming, data centers, self-driving cars, and graphics artists. The company has the necessary graphics technology to help content creators render 3D environments, but it's now also expanding into software.
Earlier this year, Nvidia unveiled Omniverse -- a software collaboration platform that allows developers to share their digital worlds with each other like sharing a document over the cloud. The company has been working on this platform for several years, and it's built to accurately simulate physical movement in a virtual world and bring together apps and tools to speed up the development of the metaverse.
Omniverse is a lucrative opportunity for Nvidia. It sells for an annual license fee like a typical subscription-as-a-service platform. Management sees this opportunity as worth billions in potential revenue, but the prospects for stretching its profit margin higher through license fees is one reason the stock price has soared 155% so far in 2021.
Nvidia generated $8.2 billion in profit on top of $24 billion in revenue over the last four quarters. But the push into software could push its profits higher relative to revenue, which is why the stock might be worth considering even at its current high stock price.
Image source: Getty Images.
2. Unity Software
One top software provider that could benefit enormously from the growth of the metaverse is Unity Software. Unity provides software solutions that are used to create, run, and monetize real-time 2D and 3D content across mobile devices, PCs, game consoles, and virtual reality devices. It is widely used in the video game industry, where 71% of the top 1,000 mobile games were made with Unity during the fourth quarter of 2020.
Unity recently announced the acquisition of Weta Digital for $1.625 billion. Weta is the software studio that created many of the special effects used so effectively in blockbuster movies like Lord of the Rings, Wonder Woman, and Avatar, and management plans to offer the basic technology behind that was instrumental in creating those effects in a cloud-based version. This will allow millions of consumers to create content on social media and gaming platforms, which serve as the building blocks of the metaverse.
The addition of Weta Digital is expected to expand the company's long-term growth opportunity by an estimated $10 billion.
Unity has been posting impressive revenue growth since its initial public offering in 2020, with the top line advancing by an average rate of 45% each quarter. The company is still in the early stage of expanding its software offering to non-gaming use cases in other industries. Before the Weta acquisition, management estimated its addressable market at $29 billion, but given Unity's trailing-12-month revenue of slightly over $1 billion, this stock has tremendous long-term upside.
Image source: Roblox.
3. Roblox
If you are looking for a pure-play option to invest in the metaverse, Roblox is your best bet. It has 47 million daily active users that come to its platform to play games, but management sees potential for the metaverse to appeal to a broad audience beyond those interested in gaming.
Virtual concerts are already becoming a popular activity on Roblox. In July, Roblox teamed up with Sony Music to bring more recording artists to the platform. In November 2020, over 36 million people watched the virtual concert by Lil Nas X. More events like this, especially as the graphics fidelity on the platform advances, could turn Roblox into the next Facebook, or even its parent Meta Platforms.
The stock jumped to a new high after Roblox's strong third-quarter earnings report. Time spent on the platform reached 11 billion hours for an increase of 28% over the year-ago quarter. When time spent goes up, users spend more money on Robux, which is the virtual currency required to purchase upgrades to personal avatars and unlock other experiences on the Roblox platform. For the third quarter, Roblox reported $509 million in revenue, an increase of 102% year over year.
Roblox is not profitable yet, mainly because management is continuing to spend heavily on developer exchange fees, which are basically the incentive fees paid out to content developers on the platform when they exchange earned Robux for real-world currency. Still, as long as hours spent on the platform continue to increase, this top IPO stock should continue to hit new highs for years to come.
