The metaverse became a hot topic last year as speculative investors cheered on the potential creation of a sprawling VR world supported by cryptocurrencies and decentralized apps. But over the past year, that enthusiasm fizzled out as high-profile efforts like Meta Platforms' Horizon Worlds and Decentraland sputtered out.
Rising interest rates and other macroeconomic headwinds then drove investors toward more conservative investments, and the market seemingly lost its appetite for all metaverse-related stocks. Despite that downturn, investors should still consider buying these three stocks that provide some limited exposure to the metaverse within their larger businesses.
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1. Autodesk
Autodesk (ADSK 0.71%) is best known for its AutoCAD computer-aided design and drafting software, but it also provides a wide range of cloud-based software for architects, engineers, manufacturers, and media professionals. Many of the crucial tools that are used to build digital worlds within the metaverse can be found in Autodesk's portfolio.
Autodesk's Maya, 3ds Max, Mudbox, and Motionbuilder applications are all used to create 3D animations and special effects for video games, TV shows, movies, and VR software. It also recently integrated Revit, a building modeling tool, into Epic Games' Twinmotion 3D visualization software platform. That partnership, which proves that the metaverse isn't just built for games, enables professionals to collaborate on 3D models in real-time.
Autodesk's stock declined about 30% this year as investors fretted over its cooling growth. It expects its revenue to rise 14% this year, compared to its 16% growth in both fiscal 2022 and fiscal 2021. Analysts expect just 10% growth in fiscal 2024. It blames that slowdown on macro and pandemic-related headwinds, a higher mix of shorter-term contracts that generate lower upfront payments, geopolitical challenges in Russia, and tough currency headwinds.
However, Autodesk also remains firmly profitable, its net revenue retention rate remains comfortably above 100%, and its stock looks reasonably valued at 27 times forward earnings. Investors who want a balanced play on the metaverse -- as well as exposure to the mission-critical architecture, engineering, and manufacturing sectors -- should take a closer look at this stock.
2. Sony
The Japanese conglomerate Sony (SONY -0.13%) is also expanding into the metaverse through its gaming division, which generated 26% of its revenue and 12% of its operating income in its latest quarter. Popular multiplayer games on the PS5 already represent an entry point into the metaverse, but Sony has also been expanding its presence in the VR market with its PSVR headsets -- which are tethered to its PlayStation consoles and encourage game developers to add more VR features.
The first version of the PSVR, which was launched for the PS4 in 2016, sold about 5 million units through the beginning of 2020. Sony plans to launch the second-generation PSVR 2 in February 2023. The new headset will cost $550, compared to a $400 launch price for the original device. That price tag seems steep, especially since the PS5 costs $500, but Sony's decision to move forward with a new headset suggests it still sees brighter days ahead for the VR and metaverse markets.
As for the rest of Sony's businesses -- which include its movie, music, consumer electronics, and image sensor divisions -- they're recovering in a post-pandemic market. It expects its revenue to rise 17% this fiscal year, but for its net income to dip 5% as it sells a lower mix of higher-margin first-party games, licenses fewer shows and movies to streaming media platforms, and navigates tough currency headwinds. That said, Sony still looks incredibly cheap at 16 times forward earnings.
3. Apple
Lastly, Apple (AAPL -0.35%) is widely expected to enter the metaverse next year with a mixed reality (MR) headset that blends together augmented reality and virtual reality features. Not much is known about the device yet, but recent rumors suggest it will be lighter and more powerful than Meta's current generation of Quest headsets.
Apple has often disrupted markets that it didn't create. It's widely credited for popularizing MP3 players, smartphones, tablet computers, and smartwatches, but it only entered those spaces after other companies tested the market first. If Apple pulls off the same feat with MR headsets, it could become a new revenue stream that would diversify its business away from the iPhone (47% of its sales in its latest quarter) while tethering more users to its services ecosystem.
If Apple's upcoming headset gains enough momentum, it could become the bedrock of its own metaverse. That new computing platform would enable Apple to launch additional apps and subscription services beyond its core iOS, macOS, watchOS, and Apple TV platforms.
That's all speculation for now, but Apple's main business remains resilient on its own. Analysts expect its revenue and earnings to grow by 3% and 2%, respectively, this year as it laps its 5G upgrade cycle in 2021, then accelerate in 2023 as it rolls out new products and services. Its stock looks reasonably valued at 22 times forward earnings, and its $169 billion in cash and marketable securities makes it a safe tech stock to hold as rising rates punish companies with poor liquidity.
