The metaverse could be one of the biggest emerging product and service trends of 2022, but investors don’t have to wait to build an early position in this potentially revolutionary trend. Recent market volatility has led to promising players in the space trading at fresh discounts, and some are worth buying before this year is out.
With that in mind, a panel of Motley Fool contributors has identified three stocks that are primed to benefit from surging metaverse momentum. Read on to see why they think that these three companies will take your portfolio to the next level.
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The social media giant is evolving into a metaverse company
Parkev Tatevosian: Meta Platforms ( FB -1.14% ), the company formerly known as Facebook, is arguably the reason why so many people are talking about the metaverse right now. The name change follows a shift in focus for the social media company that has amassed over 3.5 billion monthly active users across its family of apps (Facebook, Instagram, WhatsApp). The company’s apps are free to join. It makes money by showing advertisements to people spending time on its platforms. Since the metaverse is a place where people can interact with each other and the environment virtually, having a large foundation of users is a great start.
In addition to a strong foundation of users, Meta is generating massive profits from its core social media business — over $20 billion in operating profit in each of its last four fiscal years. Looking back longer, Meta has grown free cash flow at a compound annual rate of 50% in the last decade.
It can use those profits and cash to reinvest in the growth of its metaverse. Indeed, founder Mark Zuckerberg outlined ambitious goals when he spoke at the company’s most recent conference call on Oct. 25: “Our goal is to help the metaverse reach a billion people and hundreds of billions of dollars of digital commerce this decade. Strategically, helping to shape the next platform should also reduce our dependence on delivering our services through competitors.”
Fortunately for investors, you can buy this company with excellent profits in the near term and massive opportunities in the long term for a bargain price. Meta Platforms is trading at a price-to-free-cash-flow ratio of 25, the lowest the stock has sold for in the last 10 years.
This company will help you see (and profit from) the metaverse
Keith Noonan: Most of the excitement surrounding the metaverse rightfully centers around its potential software applications, but new hardware is going to play a huge role in powering the evolution of virtual worlds. Betting on individual device manufacturers has historically been tough for investors in the tech sector, and even most hardware producers will be relying on software and services to drive profits for their metaverse ventures. However, some components manufacturers stand to see big windfalls from the emergence of virtual reality (VR), augmented reality (AR), and metaverse applications.
Himax Technologies ( HIMX 1.56% ) is a small-cap semiconductor specialist valued at roughly $1.8 billion, and I think it stands out as a great pick-and-shovel play for investors aiming to benefit from the metaverse trend. The company’s core business revolves around display drivers — chips that regulate the colors displayed by pixels on screens. Himax’s chips are already used in televisions, mobile devices, and automotive displays, and the business is on track to enjoy powerful tailwinds if metaverses continue to gain traction as places for digital socialization and commerce.
Himax investors have waited for years for virtual reality and augmented reality glasses to provide the company with a substantial new high-margin revenue source. These product trends were slower to emerge than many investors and analysts predicted, but it looks like the picture is starting to come together.
Between the company’s strong position in the mobile market, fast-growing demand for automotive display chips, and the potential for exploding demand for chips used for AR and VR headsets, Himax has some strong growth catalysts on the horizon. The company produces essential components that will be at the heart of immersive virtual experiences, and its earnings and valuation could soar as the promise of the metaverse increasingly becomes a reality.
A company that makes the metaverse possible
Jason Hall: There are a handful of wonderful companies that are building the framework and technology that the metaverse(s) will exist on. And I agree with my colleagues, who mention two of those here, that they could make for wonderful investments as a result.
But investors shouldn’t sleep on the infrastructure companies that are critical to making virtual reality and the metaverse possible. Crown Castle ( CCI -0.42% ) is one in particular that I think investors should make part of their metaverse portfolio.
With 80,000 miles of fiber optic routes, more than 40,000 towers, and over 80,000 small cells, Crown Castle’s assets are central to the continued rollout of 5G and the high-speed connections that are necessary to handle the vast amounts of data that the metaverse will require. It’s also in the sweet spot of the value chain: Its customers, the telecommunications carriers, make the investments in 5G and other high-speed data tech, paying Crown Castle to house and operate it on that company’s vast network.
And it’s a very lucrative business. Since Crown converted to a real estate investment trust, or REIT, and first paid a dividend in 2014, the payout has gone up every year, more than a fourfold increase. Investors have enjoyed 240% in total returns over that period, outperforming the market by a wide margin:
CCI Dividend data by YCharts
And it think it will continue to beat the market. With a plan to raise the dividend 7% to 8% every year, and growing bandwidth and coverage demands as more people and businesses leverage artificial intelligence, Crown Castle is a great stock to win from the growth of the metaverse.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.