2022 is shaping up to be the year of the metaverse.
Google searches for the term have skyrocketed in the last three months after Mark Zuckerberg, the CEO of Facebook parent Meta Platforms (META 0.85%), said it was rebranding to signal its belief that the future of the company -- and technology -- is in the metaverse. The term refers to a virtual reality internet where you interact as a three-dimensional figure, rather than with a simple screen.
Zuckerberg isn't the only one betting on the metaverse, either. Interest in virtual worlds like Decentraland is surging: Its user base has grown by 10 times over the last three months to 300,000 monthly active users. While the metaverse is not a new idea, the technology for it finally appears to be in place, as does the interest and the utility for it, evidenced by the booming market for non-fungible tokens (NFTs) and the transition to a remote-first economy during the pandemic.
While there are a lot of different ways to get exposure to the metaverse, Meta Platforms is a must-own stock if you're interested in the three-dimensional internet. Here's why.
1. Facebook is the leader in VR headsets
Virtual-reality headsets are to the metaverse what the smartphone is to the mobile internet: It's the crucial piece of hardware you need to access it. Facebook acquired VR headset maker Oculus for $2 billion in 2014, and that bet finally seems to be paying off, as the social media giant has the pole position in VR headsets.
According to data from IDC, Facebook captured nearly two-thirds of the global VR headset market in the first quarter of 2021 and drove nearly all of the growth in the category. In other words, the Oculus Quest is well positioned to become the iPhone of the metaverse, and Facebook has plenty of cash to spend to ensure that it keeps that first-mover advantage.
Data from the holiday season confirms Oculus' momentum as well. In the days after Christmas, it was the No. 1 app in both Apple's App Store and on Google Play, with 1.3 million downloads from Dec. 21-27, according to data from Sensor Tower. Assuming those numbers represent 1.3 million gifted Quests, demand for the headset is growing fast.
2. Facebook is pouring cash into the metaverse
The company surprised the market with the rebrand to Meta Platforms, but the writing had been on the wall for several months. Zuckerberg regularly talked about the metaverse on earnings calls as the next important tech platform, and he touted Oculus' emergence and Facebook's own VR/AR division, Facebook Reality Labs (FRL).
Facebook said last year that it was spending at least $10 billion on FRL in 2021, and that number is likely to be significantly higher in 2022 and beyond. Most companies can't compete with that kind of war chest, and the company already has about 10,000 employees in the division, a huge number for a tech outfit.
Much like Amazon capitalized on its early lead in cloud infrastructure with Amazon Web Services, Facebook seems poised to do the same in VR and AR. With that kind of capital and its focus on the metaverse, it will be difficult to knock Facebook off its pedestal.
3. Facebook already has a built-in user base
Across its family of apps -- which include Facebook, Instagram, WhatsApp, and Messenger -- Meta has more than 3 billion monthly users. While the first stage of the metaverse is establishing an audience and engagement by selling millions of VR headsets, the next stage will likely be reestablishing many of the same social networks for functions like gaming, entertainment, learning, and working that already exist on social media platforms like Facebook and Instagram.
Here, Meta has an obvious edge with its built-in audience, as the millions of businesses that advertise on Facebook and Instagram are likely to follow the eyeballs into the metaverse, meaning that Facebook already has a way to monetize virtual worlds beyond just selling headsets.
Once again, a start-up or even a tech giant like Apple won't be able to replicate that kind of digital ecosystem so easily.
4. You're basically getting the metaverse business for free
The market has long been bearish on Facebook's future. The stock has consistently been undervalued despite its growth rate due to what seems to be the belief that the digital advertising market will slow down, Facebook's bad reputation will ultimately lead to its demise, or regulators will strangle the company.
However, after years of hand-wringing over such events, nothing of the kind has happened, and Facebook's growth continues to be remarkable for a company of its size. Revenue jumped 35% in its most recent quarter to $29 billion, and operating income rose 30% to $10.4 billion.
Nearly all of that revenue came from its advertising business, meaning the stock's price-to-earnings ratio of just 23.4 doesn't take into account the potential growth from FRL or Oculus.
That means that investors can buy Meta Platforms stock today and essentially get the metaverse business for free. If you're looking for exposure to the metaverse, buying the Facebook parent seems like a no-brainer. You get a giant, fast-growing, highly profitable advertising business trading at a bargain with the leading VR headset brand attached to it.
Whether or not the metaverse fulfills the hopes of its biggest champions, like Zuckerberg, remains to be seen. It may not become what the mobile internet is today. It is, however, where technology is headed, and the growth in Oculus sales over the holidays shows that consumers are following.
There are likely to be a number of winning stocks in the metaverse, as Zuckerberg has acknowledged, but it's almost impossible to imagine the Facebook parent, with all its advantages, not being one of them.