Since October, the tech and investment communities have been buzzing about the metaverse. What is the metaverse, exactly? It's hard to say.
Cynics would say the metaverse is nothing more than the latest in virtual and augmented reality, which have had limited impacts so far. Others believe the increased melding of physical and digital worlds will be game-changing for the ways we communicate, travel, and do our jobs, much like the internet has done over the past 30 years.
One thing's for sure: Some big technology companies will devote huge sums of money to this new computing platform. With interest rates perhaps going up next year and investors increasingly looking for profitable stocks at lower valuations, here are three tech stocks with low PE ratios, yet big potential upside if the metaverse catches on.
One doesn't have to look very far to find a reasonably priced tech stock betting on the metaverse. Meta Platforms (META 1.12%), formerly known as Facebook, coined the term and changed its name to advertise its leadership in the technology.
Yet Meta has had a relatively rough go of it this year, with a whistleblower recently testifying before Congress over Meta's alleged misdeeds and/or neglect in policing its global platform. The controversy seems to have depressed Meta's valuation, which trades at just 24 times earnings -- the lowest of the FAANG stocks:
While I'm not going to debate the merits of the accusations, I do think profit-killing regulation is unlikely, and Facebook's -- er, Meta Platforms' -- financial results remain strong. Revenue grew 35% last quarter, and operating profits were up 30% to $10.4 billion -- a massive amount for any company to make in a single quarter.
Not only that, but CEO Mark Zuckerberg also told investors on the recent conference call the company's huge investments in virtual reality, which makes up just about 3% of revenue today, would depress this year's operating income by a stunning $10 billion.
Adding another $2.5 billion to last quarter's operating income would have produced nearly $13 billion, up 61% from a year ago, showing the huge operating leverage still present in Facebook's core business. Operating income has been about $47 billion over the past 12 months, but if one takes out investments for the metaverse, operating income would hit about $60 billion for this year.
When you consider that and Meta's huge $58 billion in cash, its P/E multiple suddenly goes under 20. That makes Meta a cheap stock based on the "legacy" Facebook and Instagram platforms alone. If the metaverse turns out to be big business, the stock is an even bigger bargain.
Whether the metaverse works out or not, one solid bet is the continued buildout of data centers, communications equipment, and consumer devices that will need more and more computing power. Enter Micron Technology (MU 1.73%), one of only three producers of DRAM memory and one of only six major producers of NAND flash storage.
Think of DRAM and NAND as the "oil" that drives the "horsepower" of computing. The more computing power you need, the more bits of DRAM. The more data that needs to be stored, whether in devices or the cloud, the more NAND flash you need.
Due to commodity-like properties of DRAM and NAND flash, prices per bit can fluctuate. That volatility and cyclicality has caused Micron Technology to trade at a huge discount to the rest of the tech industry: Currently, just 9 times next year's earnings estimates.
However, if you think about not just metaverse investments, but also 5G phones, artificial intelligence and machine learning, cloud computing, and autonomous vehicles, demand for memory is only increasing and broadening across a range of industries.
Micron's management believes we're entering a new era in which chip and memory demand becomes steadier; to highlight this prediction, management recently instituted a dividend this past summer. The new dividend, more share repurchases, and hopefully more consistency could spell a valuation rerating higher for Micron in the "metaverse era."
Kulicke & Soffa
It's not just more advanced semiconductors that will enable the metaverse. How those chips are packaged together also makes a difference, and advanced packaging should come into focus as leading-edge semiconductors become harder and harder to produce.
That should greatly benefit Kulicke & Soffa (KLIC -0.06%), a leader in wire bonding machines for the advanced packaging industry.
K&S is currently benefiting from very strong demand in its core business, as demand for semiconductors coming through the pandemic has overwhelmed the industry. Results have boomed this year -- last quarter, revenue grew 173.1%, and adjusted (non-GAAP) earnings per share were up 520%.
Kulicke & Soffa has been very cyclical in the past and trades at a bargain-basement valuation of 10 times earnings. And when you consider K&S has an extra $740 million in cash on the balance sheet and no debt, the P/E ratio ex-cash is actually well under 10.
Despite fears of a downturn, CEO Fusen Chen sees next year looking a lot like 2021, as the semiconductor boom and shortage lingers. In addition, K&S is cultivating new businesses, such as new advanced packaging techniques, as well as mini- and micro-LED equipment.
Micro-LED technology is just becoming adopted in the most advanced screens today, but it could become much more widespread in the future. It's likely that future metaverse applications may use the most advanced screens for the most realistic images, which could make micro- and mini-LED technology big business a few years out. K&S shipped its first Luminex system for advanced LED solutions in September, and management sees mini- and micro-LED technology production growing at a 55% annualized rate through 2025.
If the metaverse ramps over that time, it's possible advanced display solutions could grow even faster, making Kulicke & Soffa a bargain-priced metaverse stock today.