The metaverse is one of the most exciting technology trends on the horizon, and it represents a massive opportunity for investors. Some industry insiders and analysts even think it could grow to be a multitrillion-dollar annual market.
If the emerging product and services category even comes close to that level, it's virtually certain to create some big winners on the stock market. With that in mind, read on to see why a panel of Motley Fool contributors identified Himax Technologies (HIMX -1.72%), Unity Software (U -3.48%), and Roblox (RBLX -4.46%) as top metaverse stocks trading at big discounts from recent highs.
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This semiconductor stock is ready for the next level
Keith Noonan (Himax Technologies): Most of the metaverse's profit potential lies in software and services, but there will also be some hardware components suppliers that score big wins with the trend. You can count Himax Technologies among those that look positioned to thrive. The company is a leading designer of display-driver chips for regulating pixel colors on displays, and its products could play a key role in turning metaverse visions into reality.
Himax stock surged last year thanks to stellar revenue and earnings growth, but its share price has slipped amid headwinds related to chip manufacturing limitations and the market's mounting aversion to tech stocks. After recent turbulence, the stock trades down roughly 38% from its 52-week high. The big sell-off has pushed the company's forward price-to-earnings ratio down to just 4 and its forward-price-to-sales ratio to just 1.1, but it's important to note that this is a highly cyclical business.
With cyclical stocks, otherwise attractive price-to-earnings and price-to-sales multiples can actually be a warning sign because they can indicate that the business near the top of an upswing trend and that performance could slip in the near future. Thankfully for Himax investors, there are reasons to suspect that the stock still offers big upside.
Himax has been an early mover in developing chips for AR and VR, but it's still in the early stages of benefiting from metaverse-related hardware. The company's big sales and earnings growth last year largely came from automotive displays and mobile. While its business has historically been tied to cyclical trends, the automotive-display category is still a young market, and the mobile space still appears to be in the early stages of a major upgrade shift tied to 5G and augmented reality.
With demand in core product categories still looking strong and the metaverse just starting to take off, Himax appears to be entering into a new kind of business cycle.
A picks-and-shovels play on meta-everything
Jason Hall (Unity): There's a ton of debate about the future of the metaverse. Is there a future where we wake up and put on a headset, living our lives in a virtual environment? I'm not going to go down that path, but what I will say is that I think the practical applications of virtual reality -- that's what the metaverse really is -- will take decades to fully play out. In the interim, we could see a lot of companies focused on consumer VR deliver poor returns.
But looking more broadly at industrial applications (think product design, engineering, architecture) and entertainment content like effects and gaming, and I think Unity could be a huge winner. The company's software and its platform of services are already used to build many of the tools used in design, and many of the games we play and video entertainment we consume.
And creators are quickly adopting Unity's platform. Revenue was up 43% over the past year, and the number of users spending $100,000 or more per year increased 32%. Dollar-based net expansion rate was 142%, meaning customers are spending increasingly more money over time. And that's before its recent Weta Digital acquisition, which will move it even deeper into high-end entertainment content.
I'm not making the case that Unity stock is cheap; shares still trade for 30 times sales after the sell-off. But I love the business and its prospects to continue growing at a very high rate, and with increasingly high margins, as the metaverse concept evolves and expands. Down 48% from the high, I think the chances of market-beating returns are a lot better now.
A metaverse pioneer with nearly 50 million daily active users
Parkev Tatevosian (Roblox): Metaverse pioneer Roblox is experiencing a rough start to 2022. The stock is down 27% year to date and 51% from its high. The company was a prime beneficiary of the coronavirus pandemic. Millions of kids were sent home for remote learning, extracurricular activities were canceled, and there were limited options for entertainment outside the home.
From its first quarter of 2020 to the first quarter of 2021, Roblox gained 18.5 million daily active users to reach a total of 42.1 million. Growth has slowed ever since then. Still, Roblox impressively retained users gained during the more acute phases of the pandemic and added another 5.2 million by the end of Q3 2021.
Note Roblox is free to join, and most activities on the platform are free. Roblox makes money by selling an in-game currency called Robux, which can be used for exclusive items and premium experiences. And like customer growth, revenue exploded since the pandemic onset. Roblox's Q3 revenue of $509 million was more than all the revenue it earned in the fiscal year 2019.
While Roblox is not profitable on the bottom line just yet, it is generating robust free cash flow. Roblox has reported a free cash flow of over $100 million for five consecutive quarters. To put that into context, Roblox reported less than $15 million in free cash flow for all of 2019.
This metaverse pioneer was growing customers, revenue, and cash flows even before the outbreak, but the lockdowns put fuel on the fire, and it is sustaining the momentum. Fortunately for investors, the broad growth stock sell-off allows you to buy Roblox stock at a price-to-free cash flow ratio of 62, near the lowest it has sold for according to this metric.
