Ways to invest in the metaverse are as broad as the concept itself. Two companies I believe are great investment choices are Nvidia (NVDA 3.71%) and Unity Software (U -1.06%).
Both are helping artists and designers create the metaverse with visualization tools. Should the metaverse fade away without having a significant effect, each has ancillary segments that will keep the businesses afloat.
Image source: Getty Images.
1. Nvidia
The metaverse is solely online and must be powered with computer hardware. Knowing this, what better metaverse investment exists besides Nvidia? The company is known for its graphics processing units (GPUs) but has additional segments too. GPUs originally rendered 3D graphics but found other uses over time. Now GPUs power gaming systems, engineering simulations, and data centers because of their ability to process calculations quickly.
Nvidia has expanded to become more than just a hardware company; it's a software provider too. The most relevant metaverse software is its Omniverse offering. It facilitates collaboration on 3D projects and simulates each design, ensuring it is the most accurate representation. One example is its Omniverse Avatar, which according to Nvidia combines "speech AI, computer vision, natural language understanding, recommendation engines and simulation technologies" to create lifelike digital assistants that could assist in activities like customer service or restaurant orders. Nvidia will continue innovating to ensure its metaverse offerings are robust.
Even though Nvidia generated more than $7 billion in revenue during the third quarter alone, it is growing rapidly at a 50% rate. Its operating expenses only grew 25%, which drove an 84% increase in profits. Nvidia has many business segments, and all are executing.
| Nvidia Year-Over-Year Revenue Growth By Segment | ||||
|---|---|---|---|---|
| Gaming | Data Center | Professional Visualization | Auto | OEM & Other |
| 42% | 55% | 144% | 8% | 21% |
Data source: NVIDIA.
Professional visualization -- the segment concerning metaverse creation -- is growing quickly but only makes up 8% of total revenue, where gaming and data centers make up 45% and 41% respectively. If the metaverse becomes widely adopted, expect the professional visualization revenue share to grow.
Hardware providers used to have a cyclical stigma about them, as demand would rise and fall with the innovation cycle. Now, many products from cars to workstations have a GPU and Nvidia is constantly releasing new iterations, compressing the cycle so much that it is hardly cyclical. Plus, its software products don't experience the same cyclicality as hardware used to. As a result, its price-to-earnings ratio has expanded over the last decade.
NVDA PE Ratio data by YCharts
At 80 times earnings, Nvidia is by no means cheap. Investors must consider this risk when purchasing Nvidia stock. However, as quickly as Nvidia is growing and expanding its use cases, I think it is a great stock regardless of how successful the metaverse becomes.
2. Unity Software
Accessing the metaverse can be done via a computer, phone, or even virtual reality (VR) headsets. When hopping into this alternate reality, it's critical that the graphics be lifelike. Unity Software's offerings help content creators bring their visions to life. Whether the artist is converting a building blueprint into a VR location or creating a surface texture -- like dirt or flowers -- from a real-life photograph to make the universe realistic, Unity has a solution.
Unity has several irons in the metaverse fire. In December it acquired Weta Digital -- a 3D content creator -- to give artists the tools they need to create realistic 3D renderings. This platform has already been proven -- films like Lord of the Rings, Wonder Woman, and Avatar have used Weta's tools. In the sports realm, Unity's Metacast has partnered with UFC to create an interactive fan experience. With Metacast, fans can move the camera angle to anywhere they please, creating infinite views.
Quarterly results have been strong for Unity. Its third-quarter revenue grew 43% over last year, and the last nine months' total has increased 44% when compared to the previous nine months. Unity also operates a gaming segment that allows creators to monetize their games. This grew faster than its create segment (what metaverse content creators would use) -- at a 54% rate. Although still unprofitable, the company is spending heavily on research and development to ensure its solutions are best in class.
Unity's valuation has been a rollercoaster over the short time it has been a public company.
Unity PS Ratio data by YCharts
While its price-to-sales (PS) ratio has crashed from its peak, it still isn't nearing the lows reached during the summer of 2021. As Unity is far away from becoming profitable, expect large price and valuation swings caused by earnings reports, news, or even general market sentiment. Down more than 30% from its all-time high, Unity is a good buy here, but scale into the stock slowly, as further valuation drops may occur. Unity has much more in store for the metaverse and is a top stock pick if investors can stomach the volatility.
Both Nvidia and Unity are great businesses in general; the metaverse optionality just adds to their investment thesis. With the recent tech sell-off, the market has presented a great buying opportunity. The metaverse remains years away, so each stock should be held for a minimum of five years to allow for this idea to take shape. As both, Nvidia and Unity Software are primed for the metaverse, investors should consider adding these two stocks to set up their portfolios.
