Even from its name, the metaverse seems like a science fiction dream come true. A world of infinite possibilities that anyone can plug into from the comfort of their own home. But this dream has hit the crushing reality of high-interest rates and low returns on investment. And many high-risk metaverse stocks have been crushed alongside it.
While many metaverse stocks are strong enough to quickly pivot to artificial intelligence (AI) or other ideas, many unstable metaverse stocks haven’t been so lucky. Without a sprawling metaverse to justify their existence, some stocks have to justify themselves on good old-fashioned free cash flow, of which they have little to none. The worst metaverse stocks an investor should avoid are those with no profit and no path to profit. Many even have falling revenue or a lack of cash. Some good stocks were caught in the metaverse hype cycle, but also many bad ones.
The metaverse stocks that should be most avoided are those whose existence is hard to justify in the current market. Where once they soared on hype alone, they have now fallen due to grim reality. A careful look at their business model will show a company that just doesn’t make sense without the promise of the metaverse to latch onto. And if these companies were ever profitable, they aren’t now.
So while the market appears to have pivoted from the metaverse to AI, it’s good to do some portfolio cleaning and get rid of these metaverse stocks to sell.
Roblox (NYSE:RBLX) was once touted as a top metaverse investment due to its unique position as a content creation platform. That’s because Roblox is not just a game; it’s a development kit. It’s a set of tools that lets anyone create, share and profit from their own video games. The company is known for its popularity among children, but is also popular with teens and adults. It was thought that the metaverse needed content, and Roblox is a content-creating machine. But as an investment, this is one metaverse stock to avoid.
Roblox is burning money faster and faster each year. In 2021 Roblox had an annual consolidated net loss of $503 million. In 2022 it had an annual consolidated net loss of $934 million. And in Q1 2023, it had a quarterly consolidated net loss of $269 million. If things continue this way, 2023 will shatter Roblox’s 2022 net loss record. For a company with $828 million in cash and cash equivalents, this quarterly net loss stat gives Roblox less than a year of runway. The company’s $1.4 billion in short-term investments lengthen that runway to about 2 years, but only if its losses stagnate and do not continue to grow.
The bottom line is that while Roblox may be fun for gamers, it is not profitable for investors. Content alone is not enough for a business model. There is also the danger that, as a video game company, Roblox could fade quickly if its core audience loses interest. There have been plenty of games that started as an international phenomenon, only to fade quickly as tastes changed and people grew bored. With its lack of current profit, seemingly no path to future profit and the potential to lose everything if audiences move on to the next big thing, Roblox is definitely a metaverse stock to sell.
Cloudflare (NYSE:NET) is a cybersecurity and content delivery network (CDN) company previously seen as another high-potential metaverse company. Cloudflare’s edge cloud services were also seen as playing a pivotal role in the fast and efficient computing power needed for the metaverse. By finding a role in cybersecurity, content delivery and edge cloud, Cloudflare was once seen as a top metaverse stock.
But it has become clear that Cloudflare is a metaverse stock to avoid. Cloudflare’s most recent earnings report shows it is still heading in the wrong financial direction. While revenue increased year over year, expenses increased faster. Cloudflare’s loss from operations went from $40 million in Q1 2022 to $47 million in Q1 2023.
Cloudflare also revised down its full-year revenue guidance. They now expect to make $1.28 billion in revenue. For a company with a current market cap of around $23 billion, that would give them a price-to-sales of about 17, well above many of the other high-tech growth companies one could be investing in.
Cloudflare is in no danger of going out of business. With cash and cash equivalents of $256 million, plus sellable securities of $1.5 billion, they can keep losing money at their current rate for some time. But trending sideways does not make for a good investment either. Nor does investing in a high-growth stock that is having to cut revenue guidance. For all its promise, Cloudflare is one metaverse stock to avoid.
Coinbase (NASDAQ:COIN) was once seen as a prime metaverse stock because cryptocurrency would be the money of the metaverse, and NFTs would be its asset class. But while Coinbase is a big player in digital scarcity, that doesn’t make it a good metaverse stock. From a high level, cryptocurrency is still lacking in practical applications, and adoption is still sluggish. And while Coinbase’s stock price has increased since the announcement of an SEC lawsuit, it could go down very quickly as the case is updated.
But the biggest reasons Coinbase is a metaverse stock to sell aren’t due to high-level problems, but due to basic financials. Coinbase’s most recent earnings report shows revenue collapsing year over year from $1.2 billion to $0.8 billion. That is not the kind of collapse that should fill an investor with confidence. The bright spot is that expenses fell faster, and net loss went from $430 million to $79 million. But with the crypto boom having become a crypto bust, there isn’t much reason to expect that Coinbase’s revenue will quickly — if ever — return to its 2022 highs. I should mention the company still lost huge amounts of money during that time.
With over $5 billion in cash and cash equivalents, Coinbase is in no danger of going bankrupt. But a good investment should be growing, while Coinbase is clearly shrinking. Unless you expect cryptocurrencies to have another rally like 2021, Coinbase is a metaverse stock to avoid.
On the date of publication, John Blankenhorn did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.