The "metaverse" became one of the tech sector's hottest buzzwords over the past few years. The term was coined over three decades ago as a portmanteau of "meta" and "universe" in Neal Stephenson's sci-fi novel Snow Crash. It gained media attention as more advanced virtual reality (VR) and augmented reality (AR) devices hit the market.
Today, the metaverse represents a convergence of the physical and digital worlds via VR environments, digital AR overlays for real-world objects and environments, and new tools for remote interactions. The global metaverse market could still grow at a compound annual growth rate (CAGR) of 48% from 2023 to 2030, according to Markets and Markets, as more VR, AR, and mixed-reality devices hit the market.
Image source: Getty Images.
Investors who want to profit from that secular trend should take a closer look at Meta Platforms (META +0.22%), Unity Software (U +0.33%), and Roblox (RBLX +0.76%). All three companies provide the tools for building and experiencing those virtual worlds.
1. Meta Platforms
Meta Platforms owns two of the world's largest social networks, Facebook and Instagram, as well as the popular WhatsApp messaging platform. It served 3.96 billion people across its entire family of apps each month in its latest quarter.
NASDAQ: META
Key Data Points
Meta wants to leverage its massive reach to launch its own metaverse with its own VR headsets and VR applications. It recently launched the third version of its stand-alone Quest headset, and it continues to roll out new VR applications and games. Last year, Meta disclosed that it had sold more than 20 million Quest headsets so far -- and it expects future generations of the headset to gradually replace the smartphone as a mainstream communication device.
That's a bold claim, and the Reality Labs segment that houses its VR and AR products is still losing billions of dollars each year and offsetting a lot of the growth of its higher-margin advertising business. But if you believe in Meta's vision of a future where social networks are seamlessly blended with VR environments, then it might be smart to invest in its stock before it attracts more users and starts generating meaningful revenue from its metaverse projects.
Analysts expect Meta's revenue and earnings to grow 15% and 67%, respectively, this year as its ad sales accelerate again. Its stock is still reasonably valued at 23 times forward earnings -- so it could rally a lot higher over the next few years.
2. Unity Software
Many of Meta's most popular VR games, including Beat Saber and Pistol Whip, were created with Unity's game development engine. Apple has also partnered with Unity to produce more "spatial reality" for its Vision Pro headsets. That isn't surprising, since about half of the world's mobile, console, and PC games are made with Unity.
NYSE: U
Key Data Points
Unity's platform simplifies the game development process by bundling tools for creating graphics, sound effects, multiplayer features, and monetization features. It also helps developers integrate ads into their games. Unity suffered a severe slowdown in 2022 after Apple's privacy changes on iOS rendered its original advertising algorithm obsolete. However, it recovered from that setback by acquiring adtech company ironSource and rebooting its entire advertising business.
Analysts expect Unity's revenue to rise 54% in 2023 as it integrates ironSource, and to grow another 10% in 2024 after it laps that acquisition. It's still unprofitable, but it isn't expensive at 5 times next year's sales -- and the growth of the metaverse market might light a fire under its business as more companies develop their own VR apps.
3. Roblox
At first glance, Roblox might look like just another gaming company. However, Roblox's platform actually enables its users to create simple block-based games without any coding knowledge and share those custom experiences with other users. Its more enterprising creators can also monetize their games with an in-game currency called Robux.
NYSE: RBLX
Key Data Points
The ability to create those virtual worlds makes Roblox more of a metaverse play than a straightforward gaming one. It suffered a slowdown as COVID-19-related closures were reversed and its core audience of tween users returned to school, but its growth has largely stabilized over the past year -- and it ended its latest quarter with 65.5 million daily active users.
Roblox's massive audience of younger players has already driven big sponsors like Nike, Kering's Gucci, and Sony Music to set up their own worlds and experiences on its metaverse platform. That interactive approach could represent a major evolution for online ad campaigns beyond traditional display and video ads.
Analysts expect Roblox's revenue to rise 19% in 2023 and 18% in 2024. It isn't profitable yet, but it could gradually narrow its losses as it scales up its business and opens up its platform to more advertisers. Its stock isn't too expensive at 6 times next year's sales, and the bulls could revalue it as a growth stock again as the metaverse market expands.
