The concept of the metaverse -- in essence any immersive virtual world enabled by computing technology -- has been around for decades. The phrase was first coined by sci-fi author Neal Stephenson in his 1992 novel Snow Crash. But the metaverse has only become an investable trend in recent years, as computing technology rapidly advanced, and as tech companies began to pour truly substantial financial and engineering resources into it.
To be clear, the metaverse remains in its earliest stages from an economic standpoint. That raises the question: As the scope and influence of the metaverse grows, which metaverse stocks are the most compelling today?
I think these three metaverse stocks are worthy portfolio candidates:
A fast-growing video game development platform
Though traders initially recoiled at Unity Software's (U 3.47%) technically weaker-than-expected quarter in November, there was plenty of reason for patient, long-term investors to celebrate.
The video game development platform provider delivered solid 69% year-over-year revenue growth, to $544 million -- right at the middle of management's guidance -- and narrowed its generally accepted accounting principles (GAAP) net loss by more than half to $125.2 million, or $0.32 per share (from $253 million, or $0.84 per share in the same year-ago period). But Wall Street simply set the bar too high heading into the report; most analysts were too optimistic in modeling an even narrower net loss of $0.17 per share on revenue of $553.7 million, the latter of which would have been well above even the high end of Unity's guidance range.
Why is Unity a compelling buy right now? Unity only recently introduced new runtime fees on its Editor product back in September, a move management described as "a critical step" toward making its Create Solutions segment a sustainable business.
Though Unity admitted its rollout of the new fees "created friction with customers and near-term headwinds," the company also indicated it expects the new fees to have a "minimal benefit in 2024 and ramp from there as customers adopt [Unity's] new releases."
If that prediction holds true, and considering Unity is already comfortably free-cash-flow-positive (free cash flow was $104 million last quarter), it should be poised to enjoy significant additional operating leverage as it scales.
The tech titan formerly known as Facebook
Facebook made an obvious statement about the seriousness of its investments in the metaverse when it changed its corporate name to Meta Platforms (META 0.43%) in 2021. Founder and CEO Mark Zuckerberg insists the metaverse is the future of his company, and the social media giant is still pouring billions of dollars each quarter into developing the metaverse through its Meta Quest AR/VR (augmented reality/virtual reality) headsets and corresponding software ecosystem.
Meta's Reality Labs segment generated an operating loss of over $9.4 billion on revenue of just over $1.4 billion through the first three quarters of 2023. And management told investors in late October that the segment's operating losses will "increase meaningfully" in 2024, driven by a combination of additional investments to further scale its ecosystem as well as ongoing product development in the AR/VR space.
It's easy to lambast those investments as a waste of money in these early stages. But it's also worth noting the company that serves more than 3 billion monthly active Facebook users not only owns Instagram and WhatsApp as well, but also generated net income of nearly $11.6 billion last quarter alone. So Meta can easily afford to absorb those early losses stemming from its metaverse investments.
For investors willing to bet on an eventual inflection point in the metaverse, Meta could still be a massive winner in the coming years.
A key beneficiary of the metaverse economy
As long as the discussion is about virtual worlds, it's highly likely that cryptocurrencies will play an increased role in digital economies as the metaverse scales. For anyone who doesn't necessarily want to invest in the cryptocurrencies themselves, cryptocurrency exchange platform Coinbase Global (COIN 5.68%) could be a perfect option.
It might seem premature to bet on Coinbase as a metaverse stock as the metaverse industry is still so young. But Coinbase has also made significant strides ensuring its core crypto business is taking steps toward sustained profitability in the meantime.
Coinbase has managed to generate positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) for each of the past three quarters despite historically low volatility in the cryptocurrency space -- a key headwind for a company that benefits from higher levels of cryptocurrency trading. The achievement fulfilled a shift in direction from management in early 2023 "to be a company that can generate adjusted EBITDA in all market conditions."
I expect Coinbase will be an extraordinarily volatile stock as the crypto industry matures. But I think patient, long-term investors willing to watch its growth story play out will be more than pleased if they open or add to a position today.
