The metaverse presents a unique opportunity to advance the pace of technological expansion while also boosting investor returns. Emergence Research projects a compound annual growth rate of 43% through 2027 for the metaverse, which would make it an $829 billion industry by 2028.
Both large and small companies are working to build a robust metaverse presence. Though numerous companies will probably capitalize, Alphabet (GOOGL -0.77%) (GOOG -0.75%) and Unity Software (U -10.22%) have positioned themselves to potentially drive outsized stockholder returns in the metaverse market.
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1. Alphabet
The Google parent has become one of the largest companies in tech through mastering growth in online advertising. Its Google search engine, YouTube video site, and Android operating system drive most of the company's revenue. However, Alphabet is a wellspring of innovation, involved in dozens of tech-related businesses. The question for the company is how it derives growth after online advertising fizzles.
The metaverse could provide one answer. Following its acquisition of smart glasses maker North in 2020, it seeks to enhance its VR-related capabilities. According to The Verge, the company's Project Iris aims to use this technology to build a VR headset competing with Meta Platform's Oculus Qwest 2 headset.
Also, the public got a glimpse of its VR proficiency when Alphabet unveiled Project Starline last year. Project Starline combines hardware and software capabilities to create a "pane of glass" that serves as a 3D display. It can create a feeling of togetherness even when one is thousands of miles away.
Although such enhancements do not yet appear in the financials, Alphabet's revenue of $258 billion in 2021 amounted to 41% growth year over year. This took 2021 net income to $76 billion, an 89% increase over the same period. Limiting operating expense growth to 27% and a 75% increase in other income, primarily from unrealized gains in securities, helped boost net income.
Additionally, the condition of the company and stock should reassure investors. Liquidity of nearly $140 billion helps give Alphabet one of the most solid balance sheets in the industry. Also, with $67 billion in free cash flow in 2021, it holds plenty of cash to invest in metaverse innovations and other areas.
Moreover, the recently announced 20-for-1 stock split will make whole shares more affordable to small investors, a critical consideration for a stock that now sells for around $2,600 per share. Furthermore, its P/E ratio of 22 leaves it with a lower multiple than big-tech counterparts such as Apple or Microsoft. Hence, with the company's low P/E ratio relative to past growth, the metaverse appears poised to enhance a solid growth story.
2. Unity Software
Unity Software has positioned itself to serve as a building block of the metaverse. Its software can create 2D and 3D representations of spaces, capabilities that have drawn comparisons to the positions of Adobe and Autodesk in decades past. Time will tell whether Unity can become the next Adobe, but it has undoubtedly positioned itself well to capitalize on the metaverse.
To enhance its capabilities, it acquired Weta Digital, expanding Unity's library of visual effects tools. It has also emphasized the development of digital twins, or digital copies of existing structures. To this end, businesses such as Hyundai Motor have partnered with Unity to develop a digital twin of a factory.
Moreover, Unity has served as a marketplace for digital assets since 2010, and it has applied this knowledge to the non-fungible token (NFT) market. These blockchain-protected, one-of-a-kind creations offer potential synergies, even defining property rights within the metaverse.
Such successes helped the company generate $1.1 billion in revenue in 2021. This was a 44% increase from year-ago levels. Still, with operating expenses rising by 58%, losses in 2021 widened to $533 million versus a loss of $282 million in 2020.
Still, the continuing growth could reduce losses over time as the company projects between $1.485 billion and $1.505 billion in revenue for 2022, a 35% increase at the midpoint. Also, even with its 12% drop over the last year, its 21 price-to-sales (P/S) ratio has fallen to a record low, although it remains more expensive than Roblox, which sells for 11 times sales.
Despite this higher sales multiple, Unity has positioned itself to prosper within this emerging metaverse. With the massive growth like to accrue to this company, investors probably have a unique opportunity to buy this growth name at a significant discount.
