The semiconductor industry produces the advanced computer chips that power our most-prized consumer electronics. These components are becoming increasingly important as more goods and services harness digital capabilities, but they'll also play a critical role in futuristic technologies like the metaverse.
Some estimates suggest the new virtual world could be an $800 billion opportunity by the year 2024 with a compound annual growth rate of 13.1%. That means by the end of the current decade, companies could be capturing a slice of a $1.6 trillion market that didn't even exist until a few years ago.
Leading semiconductor companies Nvidia (NVDA 2.06%) and Advanced Micro Devices (AMD 8.31%) are already being relied upon by metaverse developers for their hardware needs. Here's why that business segment could be enormous in the future.
1. The case for Nvidia
Nvidia makes state-of-the-art graphics cards for a range of purposes, including gaming, data centers, robotics, as well as its professional-visualization segment, which is home to its Omniverse project. Nvidia Omniverse is the company's real-time 3D collaboration and virtual-world simulation platform, available to creators using its RTX graphics chips.
It can be used to develop games or any application involving a virtual environment, including the metaverse, and over 100,000 creators are leveraging its capabilities. From a financial perspective, Nvidia's professional-visualization segment made up just 7.8% of the company's $26.9 billion of total revenue in fiscal 2022, but it was the fastest growing by far with a year-over-year revenue increase of 100%.
Beyond its Omniverse project, Nvidia is already producing graphics chips that are compatible with most leading virtual-reality headsets, including the Oculus brand, which is owned by social-media titan Meta Platforms -- a key developer of the metaverse.
Fiscal 2022 was a record year for Nvidia from both a revenue and profitability standpoint. Its $26.9 billion in revenue represented 61% growth compared to fiscal 2021, and its $4.44 in adjusted earnings per share was a 78% increase. This run of growth is set to continue in fiscal 2023 with analysts projecting $34 billion in revenue and $5.55 in expected earnings.
As an investment, Nvidia stock is a fantastic way to expose your portfolio to the metaverse because it comes with a suite of high-growth, well-established segments attached.
2. The case for Advanced Micro Devices
AMD is one of the most sought-after producers of semiconductors in the world and has a portfolio of blockbuster deals to back that up. Its chips power popular gaming consoles like Sony's PlayStation and Microsoft's Xbox. Leading electric-vehicle maker Tesla also selected AMD chips to run the infotainment systems in some of its cars.
Like Nvidia, AMD also makes chips for most virtual-reality headsets, including for Microsoft's mixed-reality project, which utilizes interactions with the physical world to enrich the virtual experience. But AMD is focused on solving a key problem with virtual graphics -- they tend to trigger motion sickness among a high percentage of users.
In a small survey in 2020, motion sickness impacted over half of participants, which supported the results of studies in previous years that suggested it affects up to 70% of users. AMD's LiquidVR technology is geared toward minimizing motion-to-photon latency, which is the technical term for lagging graphics when the user moves their head -- a key cause of motion sickness. Overcoming this hurdle will be crucial to mass adoption of virtual environments in all forms, especially the metaverse, which could be used for both social and work purposes.
2021 was a big year for AMD. Its gross profit margin soared to 48% from 45% in 2020, and that helped adjusted earnings per share grow 116% to $2.79. And that came on the back of a 68% increase in revenue to $16.4 billion. The company attributed the performance to elevated sales of its higher-margin products, but pandemic-driven chip shortages also gave most semiconductor producers the ability to increase prices throughout the year.
Analysts anticipate another show of strength in 2022 with up to $25.5 billion in revenue and $3.99 in earnings. That would place AMD stock at a forward price-to-earnings multiple of 28.5, making it only slightly more expensive than the Nasdaq 100 index at 24.8. Given the company's growth rates, it's easy to argue AMD deserves a hefty premium, so the stock looks attractive even at the current price.
Maintain a long-term view
For investors who are focused on the metaverse, the longer you can keep stocks like Nvidia and AMD in your portfolio, the more likely you are to generate positive returns as both companies are well-placed to take a slice of the multitrillion-dollar opportunity over the next decade (and beyond).