Today, the internet is primarily controlled by "big tech" companies that touch nearly every aspect of the user experience. That website you're surfing? Meta Platforms probably tracks your every move, while the site could be running on Amazon Web Service's (AWS) cloud.
Some are calling Web3 the future of the internet. Built on blockchain technology, it involves cryptocurrency and non-fungible tokens (NFTs), but like any early-stage technology, it might look different years from now.
However, we can begin to follow the bread crumbs of companies playing essential roles in Web3's development. Here are three critical functions of Web3 as we know it and the best companies powering these three trends.
1. High-powered computing: Nvidia
Blockchain is a technology that tracks and records all data on it in an accessible and verified sequence, or "chain." Blockchains are very secure because users cannot alter their data; the chain is constantly updated and verified by all its users, making them safer than, for example, a company that kept all its information on a single server.
Cryptocurrencies and non-fungible tokens (NFTs) are two examples of blockchain technology in use, which often require large amounts of computing power for verifying blockchain transactions in exchange for crypto. Nvidia (NVDA -0.87%) designs and manufactures graphics processing units (GPUs) for computing applications, competing against AMD and Intel. It should have exposure to increased future demand for blockchain applications and its needed computing power.
Nvidia's stock price tumbled 30% from its highs at $346 a share, but even after its fall, the stock's not cheap, trading at a price-to-sales ratio of 25. On top of that, its market cap is already significant at $630 billion. However, it's a proven blue-chip stock in a Web3 industry that's still very young and speculative. Investors can get broad Web3 exposure by adding this computing giant on pullbacks.
2. Blockchain-powered assets: Coinbase Global
Crypto projects don't pay out U.S. dollars as rewards for supporting them; they pay out cryptocurrencies. Users need a way to exchange their crypto or participate in NFTs, and that's where Coinbase Global (COIN 7.10%) comes in. It's a cryptocurrency technology company that operates an exchange where more than 73 million users buy and sell various cryptos.
Coinbase could play an essential role in Web3 moving forward, helping bridge the gap between crypto and other blockchain assets and the traditional financial system. For example, it's launching the Coinbase card, which will allow people to spend their crypto assets at merchants where traditional payments are accepted.
The company is also launching an NFT marketplace, giving this new digital asset a bigger platform. If Web3 becomes a new digital ecosystem, Coinbase could function similarly to a bank, facilitating commerce on blockchains.
The stock went public in 2021 and its price has fallen to lows under $200 per share. Coinbase is very profitable though, generating roughly $3 billion in net income over the past 12 months. If Coinbase can fill that "banking" role and grow its user base as Web3 matures, the company's modest valuation at a P/S of 7 could leave a lot of room for investment returns.
3. Tokenization of payments: Marqeta
A digital economy like Web3 requires new and innovative types of payment technology. Coinbase can't just wave a magic wand and have its Coinbase card work without a hitch. Marqeta (MQ 3.58%) makes these innovative payment products possible with its application programmable interface (API) that lets customers make customized payment solutions.
Its software works behind the scenes, connecting new payment products to the traditional finance operating system that uses payment networks like Visa and Mastercard. It's the "middle man" between new and old. Marqeta can issue tokenized payment cards, making them suitable for Web3 applications.
Marqeta's work goes beyond crypto applications; it has many different clients, including Block, DoorDash, and more. The company generates revenue by taking a small piece of each transaction performed with products it powers. In other words, Marqeta generates more revenue as its customers grow. This model has made Block its largest customer, accounting for more than 70% of total revenue; however, as new products grow, it could lower its customer concentration.
The stock went public in 2021 and has steadily traded lower, now down more than 70% from its 52-week highs. The stock's market cap is $5.5 billion, which values the stock at a P/S ratio of 10. The company's not profitable yet, but growing at a robust rate; revenue grew 56% year over year to $131.5 million in the most recent quarter. Investors should follow the company's growth as new products like the Coinbase card launch. Investors should also keep an eye out for Marqeta's progress in tying into new products moving forward.