With the stock market in turmoil this year -- particularly the technology sector -- it's prudent to look out for quality individual companies that have been beaten down as part of the broader sell-off. That's where some of the best opportunities might be found.
Identifying sectors with strong long-term growth potential is a great place to start. The metaverse, for example, is estimated to be worth up to $30 trillion over the next decade, and a couple of well-established tech companies are already making significant inroads into the industry.
The prices of Meta Platforms (META 1.65%) and Snap (SNAP -0.29%) stock have fallen 48% and 70%, respectively, from their all-time highs. Each company has a unique strategy for developing the foundations of the metaverse, and despite (or because of) the price drop, now might be a great time to put some money to work for the long run. Here's why.
1. The case for Meta Platforms
A weak broader market hasn't been Meta's only issue recently. As the parent company of popular platforms like Facebook, Instagram, and WhatsApp, Meta has already developed into a mature business that now faces some growth headwinds. With over 3.6 billion monthly users, almost half the planet regularly engages with one of the company's products, so it was bound to hit a growth ceiling eventually.
The company has also struggled with how to manage changes in Apple's iOS related to privacy. The changes have made it harder for Meta to accurately direct targeted advertising to its smartphone users. New opportunities like the metaverse have become Meta's primary focus, in part, because of this situation. Meta proposes to own both the hardware and the metaverse ecosystem, giving it full control.
To help investors monitor the company's metaverse efforts, Meta established a stand-alone business segment specifically for all things metaverse related, called Reality Labs. Investors have expressed some concern about the segment's cash burn so far, with the project losing $10 billion in 2021 and a further $2.9 billion in the first quarter of 2022.
But given that Meta generated almost $118 billion in 2021 revenue, the Reality Labs' loss is manageable relative to the money the company brings in. It's also small in relation to the estimated multi-trillion-dollar metaverse opportunity it's trying to access down the road.
The Reality Labs segment is already beginning to bear some fruit, with Meta CEO Mark Zuckerberg recently showcasing the Cambria headset, a revolutionary piece of mixed-reality hardware designed to blend the physical and virtual worlds. If adopted, Cambria could eventually change the way people work, giving them the ability to do real-world work while also seeing digital experiences that help them to complete tasks from anywhere.
While future metaverse efforts continue to develop, there are plenty of reasons right now to own Meta Platforms stock. The company is currently building upon its Reels short-form video platform to compete with ByteDance's TikTok app, and it's investing heavily in artificial intelligence to deliver more of what users want to see. Reels already make up 20% of user engagement on the image-centric Instagram social media app.
From a value perspective, Meta stock trades at a trailing price-to-earnings ratio of just 15 based on its $13.22 in earnings per share over the last 12 months. That's much less than the Nasdaq-100 index, which trades at a multiple of 26. Just to trade in line with the broader tech sector, Meta stock would have to soar by 74%. That's enough reason to buy it on the dip.
2. The case for Snap
Snap is the parent company of popular social media camera platform Snapchat, and it's one of the leading innovators in the augmented reality (AR) space. When it comes to the metaverse, the traditional concept is experienced through virtual reality (VR), where the user wears a fully immersive headset that detaches the user's senses from the physical world around them. AR is a little different; it blends physical presence with virtual experiences, much like Meta's Cambria headset project.
Snap has a hardware product of its own in the pipeline called Spectacles. It's a pair of glasses that look just like typical, fashionable eyewear, which is in contrast to the bulky headset designs other companies are experimenting with. Amid some of the harsh criticisms leveled at social media platforms in recent years for the way they disengage users from society and trigger feelings of isolation, Snap is approaching the metaverse through the lens of user wellbeing.
It thinks the experience should encourage human interaction, rather than steer users away from it. Spectacles are designed to be worn anywhere, so users can go about daily life while having it enhanced with digital experiences that will be projected onto their field of vision by the glasses.
Like Meta Platforms, Snap has a very strong underlying business beyond its metaverse ambitions. The company's confidence in its AR approach stems from its success with the long-standing SnapChat mobile application, where over 250 million users engaged with on-screen AR experiences every day in Q1 2022 alone. That's 75% of the app's total 332 million daily active users in the quarter.
Snap generated over $4.1 billion in revenue during 2021, and analysts expect it will top that in 2022 by 33%, taking sales to $5.5 billion. The company has struggled with profitability, which is one reason its stock has fallen so sharply amid the broader tech sell-off, but there are positive signs. It generated its first-ever positive earnings per share under generally accepted accounting principles (GAAP) in the fourth quarter of 2021, and while it dipped back into loss territory in Q1 2022, the overall trend is encouraging.
As the metaverse opportunity begins to flourish in the coming years, investors might wish they had taken advantage of the 70% dip in Snap's stock right now.