The metaverse describes a virtual world that could be the next generation of social interaction. It stands to unlock unprecedented potential for businesses that are both building it, and building for it, as it takes opportunities in the digital economy to the next level.
Some estimates suggest the metaverse could be worth over $1.6 trillion annually by the end of the current decade, and three Motley Fool contributors think Meta Platforms (META -10.56%), Unity Software (U -1.06%), and Snap (SNAP 2.89%) could capture sizable chunks of that giant pie. Here's why.
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Building the virtual foundations
Anthony Di Pizio (Meta Platforms): When it comes to social connection, Meta Platforms is a pioneer of the digital age. Over 2.9 billion users visit the company's platforms every month across Facebook, Instagram, and WhatsApp, but it recently turned its attention to the metaverse. In fact, during 2021, Meta burned over $10 billion developing the project, which surprised many investors.
Combined with Meta's prediction that recent privacy changes by Apple and Alphabet's Google will cost it over $10 billion in lost revenue in 2022, the company's full-year 2021 earnings report was met with pessimism. Since its release on Feb. 2, Meta's stock has declined by a whopping 38%.
But for investors with a long-term focus, that might be an opportunity. Meta Platforms is highly profitable, generating $13.77 in earnings per share in 2021, placing its stock at a price-to-earnings multiple of just 14. That's even cheaper than the tech-centric Nasdaq 100 index, which trades at a multiple of 31, indicating that Meta stock would need to more than double just to trade in line with the broader market.
That's without factoring in the significant opportunity in the metaverse. Given the company's experience building social networks, it's perfectly positioned to develop the foundations of the virtual world that could unlock swaths of financial opportunities. The metaverse could support its own digital economy where users exist as avatars of themselves and maintain inventories of virtual goods, and as the owner of the ecosystem, Meta Platforms could stand to earn revenue from all transactions that occur within it.
Despite the company's challenges, analysts still expect Meta to generate $132 billion in revenue in 2022, which would be a 12% increase over 2021. They do anticipate a 9% drop in earnings per share, but that doesn't change the equation much with respect to the company's highly attractive valuation. The long run matters most, and this stock could be a big metaverse winner.
Image source: Getty Images.
The gold standard for game development
Jamie Louko (Unity Software): While the future of the metaverse might be hard to predict, it seems like gaming engines will play a critical role in the growth and adoption of the space. Consumers could develop their own digital worlds to experience the metaverse, which is why I think Unity could benefit from this growing industry.
Unity is one of the largest game development engines -- with its only major competitor being Epic Games' Unreal engine -- with over $1.1 billion in 2021 revenue by helping operate over 200,000 games in the past year. Many developers rely heavily on Unity's services to help them build, operate, and monetize their games: 1,052 customers spent over $100,000 in the past 12 months on Unity.
The reason that Unity could benefit from the metaverse is that it has the potential to be the leading platform for consumers who want to create a metaverse. Unity uses an easier coding language than Unreal, which means it would be easier for a non-expert game developer to code and build on Unity. Unreal does have a no-code, drag-and-drop offering, but that does not allow for complete uniqueness for customers looking to build their own digital world. While it might seem new to the consumer, any developer could theoretically create the same game with the same nodes, but if you code the game independently, the potential is limitless.
Additionally, Unity recently acquired Ziva Dynamics. This company uses machine learning to make digital characters look and act real, which enables the creation of lifelike game characters. This will allow developers to create games and digital worlds that emulate the real world like never before, making the metaverse much more appealing. With its easier coding language and top-notch graphics capabilities, Unity is poised to be the primary game developer to capitalize on the growth of the metaverse.
Shares of Unity are 51% off their all-time highs set in November 2021. However, that brought its high valuation down to a much more reasonable (albeit still somewhat high) 25 times sales. While shares might not be a complete bargain right now, there is no doubting that Unity is succeeding operationally on all fronts, and its leadership in the development space could allow for the company to be one of the prime beneficiaries of the metaverse going forward.
Image source: Getty Images.
The forefront of augmented reality
Trevor Jennewine (Snap): Snap is a camera company that specializes in augmented reality (AR). Its primary product -- the Snapchat social platform -- allows users to connect with friends and family through text, images, and video. Better yet, users can personalize visual messages using Snap's extensive library of AR lenses and filters. For instance, one of the more popular lenses will transform your likeness into a metaverse avatar.
Snap also leans on artificial intelligence (AI) to engage users. For instance, you can trigger an Amazon search by "scanning" real-world items with the camera, or you can scan a friend's outfit to shop for similar looks online. You can even scan a math problem and Snap's AI engine will tell you the answer. That's pretty amazing, and younger generations agree. In the U.S., over 75% of 13- to 34-year-olds use Snapchat, and the same is true in the U.K., Australia, France, and the Netherlands.
In 2021, daily active users grew 20% to 319 million, and that popularity continued to fuel Snap's digital ad business, despite industrywide headwinds related to Apple's privacy changes. In fact, revenue rose 64% to $4.1 billion, and Snap posted free cash flow of $223 million -- that's the first time the company has generated positive free cash flow on a full-year basis.
Despite those impressive results, its future looks even brighter. Recently, Goldman Sachs listed Snap (and Meta Platforms) among a handful of companies that should benefit from the metaverse, citing its position at the forefront of the AR industry. For instance, Lens Studio is an application that helps artists and developers build AR experiences, and the possibilities are limitless. In the future, e-commerce may look like this: You put on a pair of AR glasses, visit your favorite store in the metaverse, and try on a few items (virtually) before making a purchase. You could even meet up with friends along the way, and you could interact as avatars.
Here's the bottom line: The digital ad market is growing quickly, and Snap's popularity (especially with younger audiences) should make it an increasingly valuable platform for advertisers. At the same time, as the metaverse takes shape in the coming years, Snap is well positioned to be a key player in that multi-trillion dollar industry. That's why this growth stock could have monster upside for shareholders.
