The metaverse is interesting for a long list of reasons, but most of all because it means different things to different companies. There hasn't been a technological development that promises such a broad pool of opportunities since the dawn of the internet.
In the spirit of that idea, three Motley Fool contributors think Meta Platforms (META 1.54%), Roblox (RBLX -2.25%), and Unity Software (U -1.22%) are set to benefit enormously from the virtual world, and the exciting part is they'll do it in completely different ways.
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The next generation of social networking
Anthony Di Pizio (Meta Platforms): Formerly known as Facebook, there's likely no company better equipped to lead the world into the next phase of social media than Meta Platforms. Aside from the fact it has over 2.9 billion monthly active users, Meta Platforms has created a highly profitable enterprise out of its portfolio of assets including WhatsApp, Instagram, and its flagship platform, Facebook.
The company is well positioned to build the foundations -- or architecture -- of the metaverse, where CEO Mark Zuckerberg thinks users could exist as virtual avatars of themselves, capable of teleporting to different experiences while maintaining an inventory of digital goods. The presumption, then, is that the metaverse could support its own digital economy, and if Meta Platforms owns the ecosystem, it might be in prime position to take a cut of every transaction.
Meta Platform's current business model, which generates revenue from selling advertising, seems very one-dimensional by comparison. Yet, once the company officially reports its fourth-quarter result for 2021, analysts expect it will have generated $117.6 billion in revenue for the full year. That means since 2011, Meta Platforms has grown its revenue at a compound annual rate of 41% -- so consider its earning potential from the much broader metaverse opportunity.
The company expects building this expansive virtual reality will take a collaborative effort from technology companies, whether they develop software or manufacture hardware. The latter will be incredibly important, especially since Meta Platforms owns the Oculus brand of virtual reality headsets, which require advanced semiconductors for the best experience. Advanced Micro Devices and Nvidia both make chips and performance software specifically for Oculus right now.
While there are many metaverse stocks out there right now, few are approaching the opportunity underpinned by such a strong existing business like Meta Platforms.
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Building the metaverse before it was cool
Jamie Louko (Roblox): Roblox has been steadily building out its version of the metaverse far before 2021 when the metaverse became the hottest topic in investing. Roblox was founded in 2004, and since this, the company has been busy building its own digital universe. The video game has multiple servers where players can play together, and the platform even has its own currency, Robux, which players have promised to spend over $638 million (in real money) on. With over 47 million daily active users, the platform has created millions of worlds combining for a lively community of engaged users.
Roblox has historically been a game for children, but this is starting to change. In the third quarter, users over 13 became the majority of the daily active users on the platform, and that group grew 48% year over year and 145% since the first quarter of 2020. This shows that Roblox is appealing to older players more -- a good signal of staying power.
Roblox did benefit from the pandemic where gamers were forced to stay inside, and the company has seen slowing growth as lockdowns become scarce, but the company's performance is still strong. Revenue grew 102% year over year in Q3 to $509 million, and bookings -- which is revenue from Robux that haven't been used by the consumer yet -- grew 23% to $638 million. The company is not profitable yet, losing $348 million in the first nine months of 2021, but the company has $1.9 billion in cash and it generated roughly $489 million in free cash flow over the same period, so its losses aren't a major concern.
Some estimates have the metaverse becoming an $800 billion industry by 2028, which leaves room for tremendous growth for Roblox if it can become a major player in this space. With such broad adoption from young people and growing popularity among older kids, Roblox has the potential to be the first place users think about when they think about the metaverse. At 23 times sales, this company could still provide massive returns to shareholders if it can fully capitalize on the digital world, making it a smart metaverse pick for the long haul.
Image source: Getty Images.
A development engine for immersive content
Trevor Jennewine (Unity Software): Creating immersive 3D content is complicated. Developers need tools for graphics, lighting, and physics, and they need a powerful engine that can render content quickly. Traditionally, engineers were required to build those tools in-house, meaning they had to invest a significant amount of time and money in a project before actually creating any content. Even then, the content often had to be recoded for each individual platform. Unity does away with that complexity.
Its software helps developers build and run interactive 2D and 3D graphic experiences, and without any recoding, that content can be deployed across more than 20 platforms like iOS, Android, and Windows. Unity also offers tools for in-app advertising, in-app purchases, and user analytics, helping developers monetize their content.
Not surprisingly, the breadth of Unity's portfolio has generated strong demand in the gaming industry. In fact, 94 of the top 100 game development studios are Unity customers. But its platform has also seen adoption in other markets. For instance, architects use Unity to visualize construction projects, and retailers use the platform to create digital advertising materials.
Financially, Unity's business is on solid ground. In the third quarter, revenue surged 43% to $268 million, and while the company is still losing money under generally accepted accounting principles (GAAP), its loss narrowed to $0.41 per diluted share. However, Unity generated positive free cash flow of $34 million in the quarter, and it has a debt-free balance sheet with $1.3 billion in cash and short-term investments.
Looking forward, Unity's development engine is likely to play a critical role in building the metaverse. Whether it's one virtual world or many, the metaverse will be filled with interactive, real-time 3D content, meaning it will instantly respond to user inputs. In other words, if you kick a rock in the metaverse, it will tumble across the virtual ground. And Unity's technology makes that possible. In fact, it's already the leading development engine for creating content for augmented and virtual reality applications.
Currently, the company puts its addressable market at $29 billion, but management believes that figure will rise as technologies like the metaverse continue to evolve. In short, Unity has a strong competitive position and a growing market opportunity. That's why this stock could produce monster returns for shareholders.
