The metaverse has been an extremely hot topic as of late. Consumers have started to imagine the idea of a completely digital world where you can live and experience some of the greatest things in the world -- right from your own home.
For investors, looking at the metaverse as an investment opportunity could produce life-changing returns. If you can find companies that are enabling the creation and the development of the metaverse, you could succeed immensely, and I have two stocks that many smart investors are looking at now. Here's how I think Unity (U -1.54%) and Matterport (MTTR -1.10%)can capitalize on the metaverse.
Unity: Creating the metaverse
Unity could be the engine that creates the new digital world. Unity's software allows for video game developers to create games, and monetize and operate them once they are up and running. Using software to build a metaverse will be a critical part of its development, and Unity could be at the forefront of this, with over 1.5 million active monthly creators already on its platform.
It is unlikely that one large company will be at the center of the metaverse; a more realistic idea would be that there are millions of users creating their own lives. Without one company controlling an entire world, Unity will likely see major success. Considering that it would make money helping its millions of creators create their own metaverse, Unity has the potential to be a successful pick-and-shovel play.
The company is already an established player in the game development space, bringing in almost $800 million so far this year. It is also the software engine on which Among Us -- one of the world's most popular games -- was created. With this reputation and 973 game creators already spending over $100,000 with Unity, the company could establish itself as the primary metaverse creation tool as the market takes off over the next decade or two.
Additionally, the company has plenty of cash to invest in itself as the metaverse grows. In Q3, the company lost $115 million, a drop from the year-ago quarter when it lost $144.5 million. The company also generated $34 million free cash flow in Q3. While the company is free-cash-flow negative year-to-date, it has over $1.28 billion in cash and marketable securities on the balance sheet. While not perfect, the company's net loss improvements, recent free cash flow generation, and high cash balance could allow it to invest in whatever it needs to expand and succeed in the metaverse.
The company is valued at a jaw-dropping 40 times trailing sales, but if Unity can successfully become the primary software platform for metaverse creation, the opportunity is so large that this high multiple could be a steal today. With a loyal creator base and a growing reputation as a successful game creation engine, Unity could reap major benefits from the growth of the metaverse.
Matterport: Enabling movement
With its 3-D image capture technology, Matterport is currently allowing businesses to bring their real-life spaces to the cloud. Matterport's software not only stores digital replicas of physical spaces, but it allows businesses to analyze them and use them online. For example, Matterport can help Redfin (RDFN -3.50%) take a 3-D image of a house and upload it to its website for consumers to take a virtual tour.
The potential to bring this technology into the creation of the metaverse is astounding. Not only could individual consumers use this to bring their favorite park or other physical places into the metaverse, but it could also enable businesses -- theme parks, for example -- to take their physical offerings and create digital twins of them in the metaverse. This potential for enabling the creation of both a metaverse economy and casual spaces is vast, and Matterport is at the crux of it.
Matterport's unique first-mover advantage has allowed it to attract over 439,000 subscribers, with 6.2 million spaces. Matterport's image-capture technology can also be used on your smartphone, making it easy for creators to bring their spaces with them to the metaverse. This combination of simplicity and current adoption could create a strong brand name over the next five years.
As of today, the brand name is not too established. The company spent over $44 million on selling and administrative expenses in Q3, which represents almost 160% of revenue. The company's total operating loss in Q3 was $44.4 million, and its net loss was even worse due to changes in liability values.
The company's profitability story looks worrisome, but Matterport's total addressable market -- even without the consideration of the Metaverse -- is appealing. It is eyeing a $240 billion future market opportunity. If the company gets a sliver of this market share, the company would explode. While that is no guarantee, its first-mover advantage and large customer footprint are promising. If Matterport can make this opportunity bigger by succeeding in the metaverse, this company could be a life-changing investment.