"The metaverse" is a phrase often used but not readily understood. To date, the best metaverse definition I've heard is from Nvidia (NVDA 3.71%) CEO Jensen Huang, who simply calls it the "3D internet."
Viewed in this way, the metaverse is already here and doing some interesting things for a few techy consumers and for many businesses too. With the stock market in turmoil and creating stock buying opportunities, this next iteration of the internet is worth investing in right now. Three top "metaverse" stocks worth a look in October are Nvidia, Meta Platforms (META -10.56%), and Qualcomm (QCOM -0.20%). Here's why.
1. Nvidia: Not the only company betting big on the metaverse
Meta isn't the only company betting on immersive 3D experiences. While it hasn't gone as far as changing its name, Nvidia did name its new flagship software platform Omniverse, indicating it believes there will be many "metaverses" it plans to enable and support.
What's this business of more than one metaverse, when most investors are still unsure of what the metaverse is in the first place? As mentioned above, Nvidia's top brass simply sees the metaverse as a 3D version of the internet, a more immersive version of the websites, apps, and other services we already use every day. Thus, the metaverse will mean different things for different companies depending on what it is they do. It could be a video game, it could be a retailer app that lets you visualize a product in your home before you buy, or it could be a virtual rendition of a building an engineering team is designing. The sky's the limit.
Of course, not all of Nvidia's metaverse products are firing on all cylinders right now. Video game sales were down 33% year over year last quarter. But data center (where much of the metaverse will be built and deployed) sales were up 61%. Automotive (which more and more is becoming an autonomous vehicle segment) was up 45% and is well on its way to becoming a $1 billion-a-year business for Nvidia.
Nvidia stock is trading down some 65% from all-time highs, reflecting extreme pessimism right now as the company deals with a slowdown in consumer spending, an oversupply of gaming chips, and a new round of the U.S.-China trade war. But if you're looking for a great ultra-long-term stock to buy, Nvidia is a top choice.
2. Meta: Unloved and forgotten despite having lots of good things going for it
I understand why Meta (Facebook, Instagram, and WhatsApp) has been discarded by so many investors this year. A confluence of negative developments has been steadily building for years, and has been brought to bear against the company. The catalyst was Apple's (AAPL 0.52%) recent application tracking transparency changes to its operating systems, which reduces the value of digital ads for Meta and other software developers because it's much harder to target ads toward individual users.
As a result, the company is facing its first-ever revenue decline this year if things don't improve -- which it appears they may not with the global economy weakening in recent months. Meta's total sales were up just 2.7% in the first half of this year, which includes a 1% year-over-year drop in Q2 2022.
But there's still a lot to like about Meta. The company is still wildly profitable, with operating profit margins coming in at 29% in Q2. Meta had over $40 billion in cash and short-term investments at the end of June, and zero debt. And monthly active users are still remarkably increasing (up 4% last quarter to 3.65 billion).
That last point is notable. With literally billions of people interacting via a Meta app every month, the company's metaverse ambitions don't seem so farfetched. People love Meta products, and making the apps more immersive (i.e. the metaverse) could only increase their value over time. The "Reality Labs" segment (home of the Meta Quest virtual reality headset and app ecosystem) is a drain on the bottom line right now. But the $1.15 billion in sales Reality Labs hauled in the first half of 2022 (a 37% year-over-year increase) is impressive.
I wouldn't bet on Mark Zuckerberg being a one-hit wonder, especially not with the resources and customer depth Meta has. At just nine (nine!) times enterprise value to free cash flow, this company is practically being left for dead. I'm a buyer in the month of October.
3. Qualcomm: Mobile chips are key to the metaverse
Last November at an investor meeting, Qualcomm CEO Cristiano Amon said that the Oculus Quest 2 virtual reality headset (now the Meta Quest 2) had already sold 10 million units. That figure is based on Qualcomm's chip shipments, which power Meta's VR hardware. A year later, we don't know exactly how many Quest 2s have been sold, but some estimates point to upwards of 15 million. Not bad for an early foray into 3D immersive gaming and social experiences. And all indications are that a successor to Quest 2 is forthcoming.
This underscores the work Qualcomm is doing, and how it will play a big role in the development of the metaverse. Sure, mobile gaming and productivity hardware like VR as well as augmented reality (AR) gear could be big. Qualcomm's energy-efficient and powerful chips are ideal for this type of application, just as they've been for smartphones.
But Qualcomm is expanding its reach into other areas as the lines between the real and virtual worlds blur. One big area to watch is the company's IoT (internet of things) segment, which hauled in $1.83 billion in sales last quarter. That represented a 31% year-over-year increase. IoT encompasses consumer products like laptops, wearables, and consumer electronics, as well as energy, smart manufacturing, and smart city products. Given that the metaverse will mean different things for different companies and organizations, all of this new hardware could eventually play into the future of the 3D internet.
Like other tech stocks, Qualcomm has been blasted this year, down 38% from its all-time high. Shares now trade for 20 times enterprise value to free cash flow, a metric slightly elevated by the fact Qualcomm has been investing lots of money into research and development. This is still very much a growth company, and it could be a top bet on the development of the metaverse. Now looks like a timely opportunity to buy to me.
