As the PC and mobile markets mature, many growth-oriented investors are looking toward the metaverse as the next big computing platform. The term -- and the concept behind it -- came from Neal Stephenson's 1992 sci-fi bestseller Snow Crash, but it only gained more mainstream attention over the past few years as more advanced virtual reality (VR) and augmented reality (AR) headsets hit the market.
The bulls believe the metaverse will eventually blur the lines between the physical and digital worlds by enhancing real-world environments with digital overlays, virtually transporting people to both imaginary places and digital twins of real-world locations, and enabling people to remotely interact with each other without PCs or smartphones. It could also revolutionize video games by replacing monitors, TVs, consoles, and controllers with mixed-reality headsets.
Image source: Apple.
According to a recent report by Markets and Markets, the metaverse market could grow from $61.8 billion in 2022 to $426.9 billion by 2027 -- a compound annual growth rate (CAGR) of 47.2%. We should take that bullish forecast with a grain of salt, but these three tech giants -- Meta Platforms (META 1.54%), Apple (AAPL -0.57%), and Unity Software (U -1.22%) -- could profit from the market's secular expansion. Let's see what makes these three stocks potential buys this month.
1. Meta Platforms
In October 2021, Facebook rebranded itself as Meta Platforms to emphasize its plan to evolve from a social media company into a metaverse one. It wants to achieve that transformation by expanding its Reality Labs division, which houses its VR and AR hardware and software, regardless of the near-term costs.
Meta recently said that it sold nearly 20 million Quest headsets over the past four years. But from 2019 to 2022, the Reality Labs unit only generated $6.07 billion in cumulative revenues over those four years while racking up a cumulative operating loss of $35.03 billion. Meta expects the segment's annual operating losses to widen again this year as it launches its new Quest 3 headset this fall and ramps up its production of new AR and VR content.
Those losses are staggering, but Meta remains firmly profitable because its core advertising business (which accounted for 97% of its revenue in 2022) still operates at high margins. That business is also gradually recovering from the user privacy improvements that Apple made to iOS (which disrupted platforms' ability to target ads to people) while countering TikTok's short videos with its own similar Reels.
Meta still enjoys an early-mover advantage in the metaverse market, and the Quest 3's $499 price tag might make it the best option for consumers who don't want to spend thousands of dollars on a VR headset. That could also help tether more of the 3.81 billion people who use at least one of Meta's core apps (Facebook, Messenger, Instagram, and WhatsApp) each month to its metaverse ecosystem.
2. Apple
After years of rumors and speculation, Apple finally unveiled its new Vision Pro mixed-reality headset during its Worldwide Developers Conference on Monday. The Vision Pro is more technologically advanced than Meta's Quest 3, but it's priced accordingly at $3,499. It's scheduled to hit the market in early 2024 and will only initially be sold in the United States.
The Vision Pro's high price tag could limit its appeal, but it could gradually diversify the tech giant's top line away from the iPhone -- which still accounted for 54% of its revenue in its latest quarter. It would also enable Apple to expand its subscription-based Apple TV+, Apple Music, Apple Arcade, and Apple Fitness+ services with AR and VR upgrades.
Apple ended its latest quarter with 975 million paid subscriptions across that ecosystem, which represented 18% growth from a year earlier. By pulling some of those subscribers toward the Vision Pro and its mixed-reality apps, Apple could further strengthen the bonds between its hardware, software, and subscription-based services.
It's well worth remembering that Apple didn't invent the MP3 player, the smartphone, the tablet computer, the smartwatch, or Bluetooth earbuds. But it disrupted all of those markets by studying the mistakes of the early movers, developing more appealing products, and tethering its devices to the rest of its prisoner-taking ecosystem. If the Vision Pro follows that same trajectory, it could eventually add tens of billions of dollars to Apple's annual revenue.
3. Unity Software
Last but not least, Unity is my top pick-and-shovel play on the metaverse market. Its namesake game development engine already powers more than half of the world's mobile, PC, and console games, and many of the most popular VR games -- including Meta's Beat Saber and Population: One -- were created on its platform. That's why it wasn't surprising when Apple recently said it was working with Unity to create new apps for the Vision Pro.
Unity's growth decelerated last year after Apple's privacy-oriented iOS update disrupted its ability to target the ads for its games. However, it bounced back from that setback by rewriting its own algorithms and merging with adtech company ironSource. As a result, it expects the growth of both its Grow (advertising and monetization) and Create (game development engine and non-gaming tools) units to accelerate again this year. Unity is certainly a more speculative play than Meta or Apple, but its revenue could surge as sales of new headsets drive more developers to create more metaverse apps.
