Metaverse has become the hot buzzword in the technology sector. Widely considered to be the next stage in the evolution of internet technology -- also called Web 3.0 -- the metaverse refers to seamless, persistent, interactive, and immersive 3D virtual reality or mixed-reality experiences, which is the interaction of real-world and digital-world objects. The metaverse is expected to change the way people study, work, play, travel, and socialize by shifting many of these activities from a physical economy to a virtual economy.
Currently, anything associated with the metaverse is being increasingly considered to be the next blockbuster opportunity. However, to make money in the stock market, investors should learn to separate fact from fiction. Although the metaverse is undoubtedly a huge opportunity -- estimated to be worth $1 trillion to many trillions, depending on the source -- only a few technologically sound and financially stable companies with solid reputations will be capturing a major share of this market.
Building on this idea, Nvidia (NVDA 2.76%) and Microsoft (MSFT -3.72%) are the two blue chip companies that seem poised to make the most of this evolving opportunity.
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1. Nvidia
The metaverse entails the use of various advanced technologies such as augmented reality, virtual reality, and video streaming, which require parallel (many calculations are carried out simultaneously) and superfast computations. This can be made possible by Nvidia's industry-leading high-throughput graphics processing unit (GPU) chips.
Nvidia's GPUs are widely preferred by gamers worldwide for their capability to render ultra-realistic graphics, and by data centers for facilitating huge and complex workloads. Nvidia has recently launched its first data center CPU, Grace CPU, which is well-suited for artificial-intelligence (AI)-based and high-computing workloads.
The company has also introduced the next-generation Bluefield data processing unit (DPU), aimed at accelerating processing for software-defined networking, data storage, cybersecurity, and artificial-intelligence applications. All of these next-generation hardware technologies are well-suited to support the metaverse.
Going beyond hardware, Nvidia has also come up with a scalable, multi-GPU, and real-time software-development platform called Omniverse. This technology platform will enable real-time collaboration among global 3D-design teams working on multiple software platforms. Nvidia expects enterprises to use Omniverse for improving productivity through remote collaboration across multiple 3D-design software and by creating digital twins of a physical environment (to plan and simulate in the digital world and then replicate in the real world).
Recently, in November 2021, the company introduced the Omniverse Replicator synthetic-data-generation engine, which generates simulated synthetic data that is used to train artificial-intelligence models. The company has also launched Omniverse Avatar, which leverages artificial intelligence, computer vision, natural-language processing, and simulation technologies for creating interactive digital characters or avatars. While these avatars will play a major role in the metaverse, the immediate opportunity for the Omniverse Avatar lies in the creation of AI assistants that can help process billions of customer service interactions across industries.
Even without the metaverse opportunity, there's much to like in Nvidia, a company that accounts for 83% of the global discrete GPU market share. The company's gaming segment is benefiting from several robust tailwinds, including the ongoing video game GPU upgrade cycle and increasing overall demand for GPUs in gaming, esports, streaming, and content creation.
Nvidia's data center business is also witnessing robust GPU demand for processing AI-intensive workloads. In the third quarter, the company easily beat consensus estimates and has guided for fourth-quarter top-line and bottom-line performance far ahead of the consensus analysts' projections.
Nvidia has several strong tailwinds to bank on, including the evolution of the metaverse. Against this backdrop, I'm very bullish on this stock.
2. Microsoft
The second-largest company in the world by market capitalization, Microsoft is working to strengthen its existing cloud and business productivity offerings with the metaverse for a range of enterprise-use cases. To that effect, the company has created a mixed-reality platform called "Microsoft Mesh" and an Internet of Things (IoT) platform called Azure Digital Twins on Microsoft Azure cloud services.
Mesh enables developers to create immersive and interactive mixed-reality experiences for remote-collaboration-related use cases. In November 2021, Microsoft introduced the "Mesh for Microsoft Teams" solution, which allows Microsoft Team users to interact with digital avatars in an immersive mixed-reality environment for a range of activities such as meetings, training, or social interactions. With the popularity of work-from-home and hybrid work arrangements on the rise, this work-collaboration targeted platform can see multiple applications in the coming years.
Azure Digital Twins is an enterprise-focused tool that allows companies to create a digital simulation of real-time objects, making it easier for organizations to innovate, manufacture, and plan at much lower costs.
However, it's not only the metaverse that can catapult Microsoft's future share prices. The company's intelligent cloud (including Azure) and productivity and business-processes segments (Teams and Office 365) continue to be the key revenue drivers. Azure accounts for 21% of the global cloud infrastructure market and is the second leading player after Amazon's AWS. The increasing shift toward a subscription-based business model has also improved the company's revenue visibility.
MSFT Operating Margin (TTM) data by YCharts.
Microsoft's solid financials reflect the company's robust business model. The company's trailing-12-month (TTM) revenues were up by 19.8% to $176.25 billion. Microsoft also ranks higher than many of the big technology players in terms of profit margins. The company has $130.6 billion in cash and a much lower $78.9 billion in debt on its balance sheet.
Microsoft already provides a backdrop of a wide-moat, well-diversified, and highly profitable business, along with a healthy balance sheet. When you include the metaverse opportunity, Microsoft seems well-positioned for a solid growth trajectory in the coming years.
