Three decades ago, the internet was in its nascent stages, a new technology brimming with potential. Since then, it has evolved into an ecosystem of e-commerce websites, social platforms, streaming media, and digital financial services, fundamentally changing the way people live. The metaverse promises to be the next transformative technology, blending the internet with augmented and virtual reality.
The enthusiasm surrounding that technology has reached a fever pitch, especially among investors. While we are likely still years away from seeing a fully developed metaverse, analysts at Goldman Sachs and Morgan Stanley believe it will be an $8 trillion market in time.
With that metaverse potential in mind, Snap (SNAP 3.25%) and Unity Software (U -0.91%) look like two smart long-term investments. Here's why.
Image source: Getty Images.
1. Snap
Among its various offerings, Snap is a camera company that specializes in augmented reality (AR). Its core product is the Snapchat mobile app, a social platform that allows users to connect through images, videos, and text. The real selling point, though, is that people can personalize those communications using Snap's extensive library of AR lenses and filters.
That value proposition has translated into strong traction with younger generations. In fact, in markets like the U.S. and Australia, 90% of people between 13 years old and 24 years old use Snapchat, and that has made it a popular advertising platform.
In 2021, daily active users jumped 20% to 319 million and revenue rose 64% to $4.1 billion. The company still posted a GAAP loss, but Snap generated positive free cash flow of $223 million. That's the first time the company reported positive free cash flow on a full-year basis.
Looking ahead, Snap offers a robust suite of developer tools that could help shape the metaverse. For instance, Lens Studio is a platform that allows creators to design immersive AR experiences, which could be geared toward productivity, communication, entertainment, or other use cases. Maybe you want to remodel your home? AR technology could help you take spatial measurements and visualize new features and colors. Or maybe you want to repair an electronic device? AR technology could label the parts and guide you through the process.
Ultimately, Snap's Spectacles -- wearable AR glasses currently reserved for creators -- could pull all of those features together, overlaying the real-world with immersive AR. Maybe you want to meet up with friends for a few minutes? Using the Spectacles, you could interact as avatars without ever leaving your physical locations. You could even play a virtual game or browse a virtual e-commerce shop together.
In the near term, Snap has a massive opportunity in digital advertising, a market currently worth $240 billion in the U.S. alone, according to eMarketer. But down the road, the company's addressable market could get even bigger as its technology is put to new use cases in the metaverse.
2. Unity Software
Traditionally, content development has been a time-consuming and costly process. To bring even the most basic 3D applications to market, creators first had to build development tools from scratch, and content had to be re-coded for each gaming platform it would run on. Unity simplifies that process.
Its software suite includes tools for physically accurate graphics, lighting, rendering, and more, allowing creators to build interactive 3D content. Once built, that content can be deployed across more than 20 platforms without re-coding. Its software also helps creators engage users, optimize performance, and monetize their applications. And that comprehensive approach has made Unity the world's most popular 3D development engine, helping the company find success in markets like architecture, marketing, and film.
But Unity truly dominates the gaming industry. Case in point: 71% of the top 1,000 mobile games were made with Unity, and 94 out of the top 100 game development studios are Unity customers. And that dominance has translated into strong top-line growth. In 2021, revenue soared 44% to $1.1 billion, and the company posted an expansion rate of 140%, meaning the average customer spent 40% more.
As a caveat, Unity generated negative free cash flow of roughly $153 million over the past year. But with $1.7 billion in cash and securities on its balance sheet, the company can afford to burn money while its business scales. On that note, management puts its addressable market at $29 billion, but that figure will expand as new use cases like the metaverse continue to take shape. In fact, Unity already has an edge in that nascent market -- it's the leading content development platform for virtual reality applications, a technology that will be crucial in building the metaverse. That's why this growth stock could help you cash in on the metaverse.
