The metaverse is a hot technology trend that's currently in its early phases of growth, but it is expected to become massive in the long run thanks to its ability to connect people spread across the globe in 3D virtual worlds.
In simpler words, people can work, play, learn, and socialize within the metaverse from the comfort of their homes with the help of mixed reality devices that support both augmented reality and virtual reality. Not surprisingly, investments in this space are expected to grow rapidly in the coming years. A third-party estimate forecasts that the metaverse market could grow at an annual rate of nearly 48% through 2029, hitting a size of just over $1.5 trillion at the end of the forecast period.
Nvidia (NVDA 0.35%) and Microsoft (MSFT -0.32%) are two companies that can help investors win big from this trend. Let's see why the metaverse could send the stocks of these tech giants on a bull run.
Nvidia stands to gain from the metaverse in multiple ways. In fact, the graphics specialist is already reaping the benefits of this emerging tech trend by powering Meta Platforms' (META -0.43%) supercomputer that's supposed to help support the metaverse's growth. Meta's Artificial Intelligence (AI) Research SuperCluster (RSC) supercomputer is powered by just over 6,000 Nvidia graphics processing units (GPUs). The supercomputer will eventually be powered by 16,000 Nvidia GPUs once Meta completes the expansion of the same.
Meta believes that "the work done with RSC will pave the way toward building technologies for the next major computing platform -- the metaverse, where AI-driven applications and products will play an important role." This means that the demand for Nvidia's GPUs should ideally boom in the long run as data centers, servers, and supercomputers will have to be upgraded to tackle the real-time delivery of 3D content to millions of users around the globe.
This, however, is not the only opportunity for Nvidia in the metaverse. The company estimates that, along with chips, the metaverse will also create robust demand for enterprise software. According to Nvidia, the hardware and software opportunity together represent a $300 billion addressable market.
Now, we have seen how Nvidia tends to gain on the hardware side of things from the metaverse. The good part is that its software opportunity is also taking off. Known as the Omniverse, Nvidia already has a scalable development platform that allows creators and developers to make virtual worlds, especially digital twins -- virtual replicas of physical objects and spaces in the real world.
What's more, Nvidia claims that more than 400 companies have been evaluating the adoption of its Omniverse platform. Automotive giant BMW has tapped the Omniverse to create a digital twin of a factory, while Ericsson is using the platform to simulate and visualize 5G wireless networks before launching them.
All this indicates that Nvidia's business could get a nice shot in the arm thanks to the metaverse, and that could play a substantial role in boosting the company's already excellent pace of growth. Nvidia finished fiscal 2022 (which ended on Jan. 30) with a 61% year-over-year increase in revenue to $26.9 billion, and the metaverse opportunity indicates that it is scratching the surface of a massive opportunity.
Analysts expect Nvidia to clock annual earnings growth of 30% for the next five years, and the addition of opportunities such as the metaverse could help it grow at a faster pace and supercharge the stock in the long run.
Microsoft is another tech giant that's on track to win from the metaverse in multiple ways, including the lucrative video gaming space.
Earlier this year, Microsoft announced that it would be acquiring Activision Blizzard in a deal worth $68.7 billion. While announcing the acquisition, Microsoft's press release said that the "acquisition will accelerate the growth in Microsoft's gaming business across mobile, PC, console, and cloud, and will provide building blocks for the metaverse." It is worth noting that Microsoft already has a solid base in the gaming business thanks to its Xbox consoles, the Game Pass video game subscription service, and a big library of gaming titles, thanks to its ownership of several gaming studios.
This puts Microsoft in a solid position to tap into the metaverse gaming opportunity, which is expected to grow at a terrific pace. Cryptocurrency asset management firm Grayscale estimates that virtual gaming worlds could generate $400 billion in revenue by 2025 as compared to $180 billion in 2020. Almost all the virtual gaming revenue will be generated by in-game spending, so Activision's user base of 400 million will give Microsoft access to a large pool of players from whom it can drive incremental spending to power the growth of its gaming business in the metaverse.
Beyond gaming, Microsoft has already dived into the metaverse with Mesh for Microsoft Teams. This product, which is built on top of the popular Microsoft Teams collaboration tool, will allow people in different locations to attend meetings in immersive 3D spaces through their virtual avatars. Microsoft Teams has a user base of over 250 million, so the company can cross-sell its metaverse collaboration tool to a huge audience.
Meanwhile, Microsoft also plans to take advantage of the application of the metaverse in the industrial sector as well, where it plans to tap the growing demand for digital twins. This could turn out to be a smart move from Microsoft, given that the digital twin market is expected to generate $61 billion in revenue by 2027 as compared to $10 billion last year, according to Mordor Intelligence.
Throw in the company's prospects in other lucrative markets such as cloud computing and video gaming, and it won't be surprising to see Microsoft sustain its impressive growth in the long run. The company's revenue was up 18% year over year in the third quarter of fiscal 2022 (ended March 31) to $49.4 billion, while adjusted earnings had shot up 14%.
Analysts expect Microsoft's earnings to clock an annual growth rate of 16% for the next five years, but don't be surprised to see it do better than that, thanks to lucrative growth drivers such as the metaverse. That's why buying Microsoft stock looks like a no-brainer right now, as it is trading at 26 times trailing earnings, a discount to its five-year average multiple of 37.