This article is excerpted from Tom Yeung’s Moonshot Investor newsletter. To make sure you don’t miss any of Tom’s potential 100x picks, subscribe to his mailing list here.
Metaverse Stocks on Fire
Welcome to the holiday season — the period between Thanksgiving and Christmas where I survive on turkey leftovers, despite every kitchen appliance being on sale.
But there’s one area ostensibly not on sale: Metaverse stocks.
- Platforms. Facebook (NASDAQ:FB), Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN), Roblox (NYSE:RBLX), Tencent (OTCMKTS:TCEHY)
- Software Providers. Unity (NYSE:U), Autodesk (NASDAQ:ADSK)
- Hardware Providers. Nvidia (NASDAQ:NVDA), Taiwan Semiconductor (NYSE:TSM), Qualcomm (NASDAQ:QCOM)
Even with Friday’s market pullback, these top-ten holdings of the Roundhill Ball Metaverse ETF (NYSEARCA:META) are still worth $7.5 trillion, or 50% more than the entire market capitalization of the London Stock Exchange.
Not only are these companies massive, they’re also very expensive. Average price-to-book values top 29x, or 7.6x greater than the average firm in the S&P 500.
In other words, these Metaverse pack leaders — even if they succeed — don’t necessarily offer superior risk-adjusted returns.
So how to find Metaverse Moonshots that could go 10x… 20x… 50x? The answer, as usual, is to find under-the-radar companies doing amazing things.
3 Metaverse Stocks on the Rise
Mark Zuckerberg was just 8 years old when Author Neal Stephenson first coined the term “metaverse” in his 1992 book Snow Crash, a story where characters access the next-gen internet through a virtual reality world.
Despite the ridicule that Mr. Zuckerberg endured for “rediscovering” VR, the Metaverse is still a concept to take seriously. Tech bosses wield enormous influence over which projects get funding and a sudden surge in VR investment will doubtlessly fast-track its development.
Tech firms are also acutely aware of what’s at risk. American children between the ages of four and 15 now spend 87 minutes per day on TikTok — five times more than they do on Facebook, according to a report from security software firm Qustodio. Without enticing a new generation onto their platforms, these tech giants will go the way of MySpace and AOL.
Perhaps Facebook or some other mega-cap tech giant will succeed. But to find higher returners, we’ll need to consider smaller, under-the-radar plays with more room to grow.
High-Quality Play: Digital Turbine (APPS)
Digital Turbine (NASDAQ:APPS) is an AdTech company that has shown strange resilience against Google (NASDAQ:GOOG, NASDAQ:GOOGL) and Apple’s (NASDAQ:AAPL) dominance on mobile. In fact, you’ll often find the underdog’s legacy product On Device Media preinstalled on phones — think of Verizon (NYSE:VZ) or AT&T (NYSE:T) sponsored ads that pop up every now and then.
Fortunately, Digital Turbine didn’t stop at pop-up ads, going on an acquisition spree to create a vertically integrated digital ad agency. Today, Digital Turbine covers every aspect from programmatic ad trading to advertising platforms.
As companies begin to shift their attention to the Metaverse, Digital Turbine looks set to become a dark-horse winner once again. Google has long struggled to migrate its web-dependent advertising platform to mobile and another stumble into the Metaverse will see its mobile-native rival leap ahead.
Not everything, however, has been smooth sailing for Digital Turbine. The upstart has seen significant merger-related challenges across its nine separate offices. And its organic growth rates, which topped 82.6% this quarter, are expected to slow to 35% by 2024, according to Wall Street analysts.
Yet this mobile-native advertiser has emerged as a surprising value play in the AdTech space, especially compared to its peers. Its 4.5x forward price-to-sales (P/S) ratio makes it far cheaper than Google or Twitter (NYSE:TWTR) and a $5.4 billion valuation means it still has plenty of room to run.
High-Potential Play: Matterport (MTTR)
I’ve written about Matterport (NASDAQ:MTTR) before — a company that creates the “dollhouses” you see on virtual home tours.
Matterport now has another secret weapon that could help it succeed in the Metaverse:
Its vast repository of data.
For years, MTTR has been working with museums and stores to collect all manner of real-world imagery in 3D. You can now visit the Abu Simble Temple in Egypt and the PUBLIC Art Gallery in the U.K. from the comfort of your home. Those inclined to retail therapy can also visit virtual stores like Lloyds Antiques Aoyama to buy real-world furniture.“Welcome to our store. How can we help?”
If our universe is going digital, Matterport will be there to help.
MTTR’s greater upside, however, comes with significant valuation risks. This $6.6 billion company generated just $27 million in revenue last quarter, making it one of the most expensive stocks in the Moonshot universe. And Matterport’s declining gross profit margins suggest the startup is already sacrificing margins for the sake of growth.
But with 6.2 million spaces already under management, Matterport is already well on its way to digitizing our physical world.
Meme Stock Potential: Immersion (IMMR)
But if I had to choose one low-quality stock to buy, it would be Immersion (NASDAQ:IMMR).
In many ways, Immersion looks a lot like its money-losing peers: a history of losses, low employee morale and technology that seems too far ahead of its time.
But if companies like Facebook are seriously considering a move into virtual reality, IMMR could become what Skyworks Solutions (NASDAQ:SWKS) was to Apple’s iPhone.
Immersion is a patent licensing company focused on haptic technology, or touch-based feedback mechanisms. Its intellectual property (IP) can already be found in PlayStation 5 controllers by Sony (NYSE:SONY) and some Samsung (OTCMKTS:SSNLF) smartphones. Electric vehicles — especially those with large touchscreens — also utilize the technology.
In a sense, haptic technology has been the missing link for realistic virtual reality (run-in-place treadmills are another, for the more physically inclined). Without touch feedback, virtual worlds seem just that. Virtual. But as hardware manufacturers race to create better hardware kits, they’ll need firms like IMMR to deliver the goods.
IMMR currently trades at a $190 million valuation, down two-thirds since February. With such a cheap valuation, it’s a Moonshot that could be worth the risk.
Valuation Catches Up With the Healthcare Metaverse
Metaverse investing has also seen its share of bumps. Over the past week, every Top 10 company in the Roundhill Ball Metaverse ETF underperformed the S&P 500.
One Metaverse sector, however, will take home the “wooden spoon” prize for worst performance.
Since January, shares in web-enabled healthcare firms Teladoc (NYSE:TDOC) and TalkSpace (NASDAQ:TALK) have declined 50% and 77%, respectively. HIMS, IRTC, SLHG and a whole host of others have seen similar drops.
At first glance, investors might blame the post-pandemic economy. A return to in-person doctor visits would surely reduce the need for offsite medical services, no?
A deeper look, however, shows that valuations were the more likely culprit. Teladoc’s price-to-sales ratio peaked at 50x in February — lofty even for a company expected to grow 80% next year. TalkSpace’s CEO resigned this month after failing to hit lofty targets (23% topline growth apparently couldn’t please the board).
These two companies will eventually rebound; rising healthcare prices will continue to push providers to more cost-effective solutions. But when investing in Metaverse stocks, it helps to keep expectations in line.
Can GameStop Succeed In the Metaverse?
In February, I wrote how the incoming GameStop (NYSE:GME) CEO Ryan Cohen needed help to send GME back to $500. With only 13% of GME’s voting shares, the activist investor would need the help of retail investors to secure the board chairmanship.
Now that Reddit has helped Mr. Cohen accomplish that task, what’s next?
Many on Wall Street have speculated that the 36-year-old entrepreneur would reuse his Chewy (NYSE:CHWY) playbook. Mr. Cohen himself suggested that e-commerce fulfillment could become a major part of GameStop’s business.
But Chewy’s founder has a habit of surprising Wall Street. In October, the firm quietly removed its Chief Operating Officer, a recent hire from Amazon’s multi-channel fulfillment department. In her place, a dozen crypto and NFT-related job postings cropped up on the GameStop careers page.
It wouldn’t be the first time GameStop has attempted online gaming. In 2010, the firm bought Kongregate, a San Francisco-based company creating browser-based games. And in 2011, the firm followed up with two acquisitions that would allow users to run games in the cloud.
These early acquisitions ended in failure — the Texas-based retailer seemed ill-equipped to make the jump online.
But this go around, GameStop seems to have a newfound purpose. Perhaps this time might be different after all.
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On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.