Earnings season is revving up – and with those Q2 reports, we’ll be getting the latest read on the hottest trend of 2021: the metaverse. (It also just made the cover of Time magazine for August!) First up: Snap Inc. (NYSE:SNAP).
See if you can relate to Luke Lango’s description of Snapchat below. (I certainly do!)
“Everyone loves to think of Snap as this niche social media platform only teenagers use to send silly – and sometimes lecherous – messages to one another.
“I get it; I used to view Snap in that light. When the company IPO’d in early 2017, I was one of the stock’s most vocal bears.
“But in late 2018, a buddy of mine in Silicon Valley – a software engineer at one of the world’s leading technology firms – met Snap CEO Evan Spiegel,” Luke goes on. “He told me to not bet against Snap. ‘Spiegel is building the future of the internet,’ he said.”
Since then, SNAP went +471% higher – and back again. “This is like, what, the third time our stock’s been in the teens in the last five years. And over that period of time, we’ve grown our revenue more than 5X,” Spiegel noted on CNBC in June. “I think our community has nearly doubled; so, we just stay focused on the long term.”
Snap is scheduled to report Q2 results on Thursday afternoon…and augmented reality is always a big theme. In May, executives warned that Q2 revenue growth will be around 20%.
I say “warned” because Snap had been running in the 30% range before that… But I’d have to say: 20% growth in this economy? I’ll take it!
And how does Snap do it? Because it’s becoming “a B2B AR software solutions provider to the entire fashion industry,” to quote Luke again. By 2030, “we see every major retailer – Nordstrom, Amazon, Walmart, Urban Outfitter’s, Nike, and more – using Snap’s AR filters.”
Below are three outfits viewed virtually in Snapchat – with a nice “Shop Now” button for the online store Farfetch (NYSE:FTCH):
Another retailer beta-testing Snapchat’s new try-on-clothes in AR feature is American Eagle Outfitters (NYSE:AEO).
Given that they share an audience – Gen Z – American Eagle has been leaning in to Snapchat at least since its 2021 back-to-school campaign. Among the spokesmodels, I spot a couple of young actors, including one of the “Stranger Things” kids, and perhaps some TikTokers…?
American Eagle even created digital outfits for Snapchat’s “Bitmoji” avatars, so customers could copy looks from the teen celebrities in its campaign. They’re kind of like what you see with Zuckerberg’s Meta Avatars today:
But Snapchat’s new Dress-Up feature could be a much bigger hit:
American Eagle (and other retailers) say product return rates are on the rise. But after trying on with AR, Snap says that 66% of shoppers are less likely to return something – according to its June survey. As for purchasing products in the first place… Snap also found that 70% of respondents were likely to buy after using AR!
We’ll see how that translates into revenue and profits for Snap in Q2 and beyond.
In Thursday’s report, Snap said to look for “revenue and adjusted EBITDA below the low end of our [previous] Q2 2022 guidance range.” That had been “between breakeven and $50 million” in EBITDA – so Snap may not turn in a profit this quarter – as well as something like 20% revenue growth.
“The 2022 ‘ad recession’ has arrived,” concludes Luke. However, you can feel comfortable buying the dip if you agree with his bull thesis on SNAP (and other digital advertisers stepping into the metaverse):
1. Ad recessions aren’t that big, and they don’t last long.
2. Digital ad stocks are valued at record-low valuations.
3. Once this ad recession ends (soon), digital ad stocks will rebound (huge).
Two Categories of Metaverse Plays
Ultimately, to decide which metaverse developers are most worth looking at now, you’ve got to pick your preferred “flavor” of metaverse experience.
Metaverse technology can be fully immersive, like with virtual reality (VR) headsets, and then there’s augmented reality (AR).
The former is what Mark Zuckerberg famously showed off last fall… And as of February, the Meta Platforms (NASDAQ:META) formerly known as Facebook attracted 300,000 monthly active users (MAUs) to its Horizon Worlds metaverse.
Similarly, The Sandbox (SAND-USD) had 350,000 MAUs as of April, its “Alpha Season 2,” with Season 3 to begin next month.
The Sandbox is perhaps the most popular “open metaverse,” a concept which it’s just raised another $75 million to promote – and which got it chosen yesterday as the “Launchpad Project of the Year” by Binance (BNB-USD).
Since The Sandbox is built on Ethereum (ETH-USD), with bridging to Polygon (MATIC-USD)… You can earn SAND crypto, trade NFTs, and take the proceeds with you – rather than leave your money with Big Tech.
While Horizon Worlds has just won Jordan Peele, who brought his film IP there last Tuesday (including the new movie he’s promoting, “Nope”)…
I would have to say that The Sandbox is the metaverse of choice for big brands, franchises, and celebrities – like Snoop Dogg, “The Walking Dead,” Adidas (OTCMKTS: ADDYY), and most recently: Playboy and Tony Hawk. It’s certainly been a big winner in our InvestorPlace Ultimate Crypto portfolio, where SAND crypto has returned +88% even through the bear market.
But neither Zuckerberg’s metaverse nor The Sandbox is very realistic. Like Roblox (NYSE:RBLX), The Sandbox characters look kind of like Lego guys.
So far, realism is more the purview of augmented reality – as AR apps are specifically designed to intersect with our “real world.” (Hence the name!)
For example, Shopify (NYSE:SHOP) is using the new RoomPlan API by Apple (NASDAQ:AAPL) to deliver a “reset button” for a room in your home. After (virtually) clearing out the furniture, iPhone developers can then show you how potential new décor would look there.
Augmented reality is also a major theme in the 2022 Accelerator program at Disney (NYSE:DIS). Winners announced last Wednesday include Red 6 (for AR headsets), Obsess (for e-commerce), Flickplay (AR app with NFTs), plus the Polygon blockchain network.
I’ve focused more on an AR play today because, frankly, it’s seeing the most movement lately. And offerings like Snapchat may be the best way to pull a broad audience “into the metaverse,” at least initially.
On the date of publication, Ashley Cassell did not have (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. To have more news from The New Digital World sent to your inbox, click here to sign up for the newsletter.