In 2021, the metaverse emerged as the next big thing in the investing world. But what exactly is the metaverse? Think of it as a parallel, computer-generated world that people can enter and in which they can interact with one another and their surroundings.
Technologies that will help it come to life include virtual reality (VR) and augmented reality (AR). This project is still in its early stages, but two stocks that can help investors profit from it in the future are Meta Platforms (META -12.42%) and Snap (SNAP -0.27%).
1. Meta Platforms
Meta Platforms, formerly known as Facebook, changed its name in October 2021 to signal its desire to focus on building the metaverse. Indeed, CEO Mark Zuckerberg called it "a major area of investment" for the company. In 2021, Meta Platforms invested billions of dollars in this opportunity.
The company does not expect these efforts to be profitable anytime soon, but this long game could pay off eventually -- and in a big way. First, Meta Platforms is already a leader in VR, largely thanks to its popular Oculus headset. In the third quarter of 2021, the company's non-advertising revenue came in at $734 million, a 195% year-over-year increase. Meta Platforms credited this performance to solid sales of its Oculus Quest 2.
Image source: Getty Images.
Another thing that could help jump-start Meta Platforms' metaverse ambitions is its massive user base. Across the range of its website and apps, Meta Platforms had 3.6 billion monthly active people as of Sept. 30, 2021, representing a 12% year-over-year increase. Meta Platforms could realistically use various marketing techniques to entice many of these users to join the metaverse.
Zuckerberg hopes to attract 1 billion people to the metaverse in the next 10 years, and starting from its existing ecosystem seems like an obvious move. Meta Platforms sees a massive opportunity for digital commerce within the metaverse -- that is, users will need to purchase various accessories to function within this parallel world.
The company said during its third-quarter earnings call that it is investing in building a digital commerce platform for the metaverse, and it hopes to "support hundreds of billions of dollars of digital commerce" within the next decade. With that said, investors shouldn't consider purchasing shares of Meta Platforms just because of these lofty ambitions. Aside from the future opportunities, the company continues to record solid financial results.
In the third quarter, it reported total revenue of $29 billion, 35% higher than the year-ago period. On average, the company has increased its revenue by 42.1% per year in the past five years. On the bottom line, Meta Platforms' reported a net income of $9.2 billion, 17% higher than the third quarter of 2020.
Although Apple made some changes to its operating system that harmed Meta Platforms' advertising business, the tech juggernaut is making a push to incorporate e-commerce into its popular websites and apps. That alone could be another massive opportunity that will yield tangible results for the tech company moving forward. Even with a $922 billion market cap, Meta Platforms still has a long runway for growth.
2. Snap
Snap, the parent company of Snapchat, hasn't explicitly embraced any metaverse ambitions. But investors interested in this opportunity shouldn't overlook this company. Snap has been making moves in AR for a while and arguably stands as one of the leaders in this space. For instance, the company's Lenses feature boasts AR capabilities, allowing users to modify the appearance of various objects in the real world.
Snap has also developed AR headsets called Spectacles. The company sees AR as a big opportunity. As CEO Evan Spiegel said on Snap's third-quarter earnings call, "Augmented reality is one of our most exciting long-term opportunities because it is simultaneously very early in its technological development and already used by hundreds of millions of people."
Much like Meta Platforms, Snap will tap into its existing user base to help advance its AR goals. The company had 306 million daily active users (DAUs) in the third quarter, a 23% year-over-year increase. And it recorded total revenue of $1.1 billion during the quarter, 57% higher than the year-ago period. Snap recorded $1.2 billion in revenue for the full fiscal year 2018, which shows how much its top line has grown in the past few years. Importantly, more than 200 million of the company's DAUs already use Snapchat's Lenses daily, according to management. It'll be easier to get more users on board when they have already gotten a taste of the technology.
Image source: Getty Images.
Beyond AR and the metaverse, Snap's opportunities lie in the fact that it still has significant room to grow its user base. After all, Snapchat boasts just a fraction of the total number of users on Facebook, for instance. Despite how popular it already is, Snapchat's penetration in North America stands at only 24% -- it's even lower in Europe and the rest of the world.
Apple's iOS changes also harmed Snap's advertising business, but in the long run, the company will likely adjust to these changes and continue to attract lucrative targeted ads on its platform, especially as it increases its DAUs. Snap is still not consistently profitable, and that could bring near-term headwinds and volatility for the company, especially as it navigates the new challenges posed by Apple's iOS changes.
But consider that last year, Snap's CEO Evan Spiegel said that the company expects 50% annual revenue growth for the next several years. What's even more surprising about this projection is that it does not assume additional user growth or engagement. Wall Street seems to agree: Analysts project the company's revenue to increase by 94.3% per year for the next five years.
These dazzling top-line increases will help the company eventually become profitable. For investors that are willing to ride out the storm, this investment could pay off in the future, and not only because of the metaverse.
