1 Monster Metaverse Stock Down 63% to Buy Now

The metaverse offers a degree of potential that businesses haven't seen since the dawn of the internet. Companies tend to have different visions for what this digital world could be, depending on their current business models. But most of them perceive a virtual existence of some variation for their users, and even the possibility of a self-sustaining digital economy.

Social media powerhouse Snap (SNAP -1.13%) could be at the forefront of metaverse development, as it's constantly building on its augmented reality technologies. In 2021, I expressed some concerns about the company's valuation, but Snap stock has fallen by 53% since then, and 66% from its 52-week high.

The metaverse promises new life for this alternative-reality innovator, so with its stock beaten down, now might be the time to buy.

Image source: Getty Images.

Taking a different approach

The big challenge for social media companies like Snap is delivering the hardware necessary to connect users to new, digital experiences. With their current applications, the supporting devices are built by third parties like Apple, which makes the iPhone.

Meta Platforms (META -11.90%), formerly known as Facebook, purchased Oculus -- a company that makes virtual reality headsets -- in 2014. These products will act as a portal to the metaverse for its users. Snap, on the other hand, has opted to create its own line of augmented reality glasses, dubbed Spectacles, with the latest generation released in May 2021. 

There's a key difference here. Virtual reality places the user inside a digital world, where they can teleport to different experiences, only bound by the expanse of the universe developers have opted to create. This is the direction most metaverse companies are going in. But augmented reality, which Snap is focused on, allows the user to interact with the existing physical world, projecting digital experiences into their vision to enhance what they're seeing. 

Augmented reality has some obvious benefits, including that it ties your physical existence with a digital one. Snap says it designed Spectacles to foster human connection and to allow the user to remain engaged with the physical world, which it believes is critical to the user's well-being. After all, multiple studies highlight the issues with social media platforms, which can enhance feelings of loneliness, so there's a good argument for Snap's iteration of the metaverse quelling some of the potential negatives.

Growth is soaring

Setting futuristic technologies aside for a second, social media companies were massive beneficiaries of the pandemic -- and Snap was no exception. Lockdowns and work-from-home trends meant people were spending more time online, and platforms like Snap were an entertaining escape from the stress caused by all of the disruptions.

As a result, the company is on track to more than double its revenue since 2019, once it has officially reported its Q4 results for 2021.

Data source: Snap, Yahoo! Finance. CAGR = Compound Annual Growth Rate. Snap reports its Q4 2021 results on Feb. 3, 2022.

In 2022, analysts expect Snap to generate revenue of $5.5 billion, which represents marginally slowing growth to 38%. But investors might be more focused on profitability because, since listing on the stock exchange in 2017, Snap has incurred consistent yearly losses. This year, its earnings are expected to grow by 55% to $0.56 per share in a very positive turnaround. 

Why the stock is a buy now

When Snap's stock traded near its all-time high of $83 a share, it had a market valuation of over $130 billion. That represented an astronomical price-to-sales (P/S) multiple of 32, based on estimated 2021 revenue. For context, during the same period, Snap's direct competitor Meta Platforms traded at a P/S multiple of just 9 based on 2021 revenue. Snap's stock, therefore, traded at a 255% premium to Meta, despite Meta being a significantly larger, more technologically diverse, and more profitable company.

But thanks to the recent tech market sell-off, Snap's valuation is far more attractive now. Its price-to-sales multiple has shrunken to 12, which is palatable given its strong revenue growth rate and its pivot to profitability. 

Plus, in the medium term, some predictions suggest the metaverse as a whole could be an $800 billion opportunity by 2024, so Snap has the potential to accelerate its revenue growth if it can capture a slice through its augmented reality technology. 

Exposing your stock portfolio to the metaverse is a great idea given its potential, and Snap might be the way to do that. The current 63% discount in its stock price could deliver significant rewards to patient investors who adopt a long-term outlook.