How to Invest in the 'Metaverse'?

These three wide moat companies are pouring billions into the intersection of virtual reality and augmented reality

14/09/2021 13:29:00
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Woman with virtual reality headset

The world of immersive technology is undergoing a seismic shift as new innovations rapidly change the digital realms we inhabit. One of them is the emergence of the “metaverse”, touted by Big Tech as the future of the internet.

Regarded as the next best thing in technology, the metaverse is a colossal communal cyberspace built on the intersection of virtual reality and augmented reality. It’s an immersive world where millions of users, or their avatars, can slide in and out of a plethora of activities as they socialise, work, and play.

The following three companies are betting heavily on the metaverse as they pour billions in the technology designed to bring physical and virtual realms closer than ever. While the concept hasn’t yet achieved the ubiquity of the internet, the following purveyors of metaverse represent attractive propositions for investors looking to play a megatrend right from its infancy.

Metaverse Merchants to Watch

Stock: Facebook

Price: $378

Fair Value: $407

Star Rating: 3

Economic Moat: Wide

The world’s largest online social network, Facebook (FB) boasts 2.5 billion monthly active users who engage with each other by exchanging messages and sharing news events, photos, and videos. The firm’s various brands include the Facebook app, Instagram, Messenger, WhatsApp, and a host of services built around these products.

Facebook generates more than 90% revenue from advertising, of which 50% comes from the US and Canada, and 25% from Europe.

Facebook’s chie executive Mark Zuckerberg is a devout proponent of the metaverse and has been publicly speaking about pushing deeper into the digital realm. "It's a virtual environment where you can be present with people in digital spaces. You can kind of think of this as an embodied internet that you're inside of rather than just looking at," Zuckerberg recently said of the metaverse during Facebook's earnings call.

Over the years, Facebook has been investing heavily to build its version of the metaverse, calling it the next chapter for the company. “In the coming years, I expect people will transition from seeing us primarily as a social media company to seeing us as a metaverse company,” Zuckerberg claimed during the call.

A robust growth in users and user engagement, the valuable data that they generate, and continuing growth in online advertising “bodes well for Facebook, as the firm generates strong top-line growth and remains cash flow positive and profitable,” says Morningstar equity analyst Ali Mogharabi, who recently raised the stock’s fair value from $390 to $407.

Stock: Microsoft

Price: $295

Fair Value: $325

Star Rating: 3

Economic Moat: Wide

Tech juggernaut Microsoft (MSFT) develops and licenses consumer and enterprise software. Better known for its Windows operating systems and Office productivity suite, the company also offers intelligence cloud (Azure, Windows Server OS), and personal computing (Windows Client, Xbox, Bing search, and Surface laptops, and desktops).

Microsoft recently revealed its intentions to become a dominant player in the professional metaverse. Chief executive Satya Nadella shared the company’s vision for an “enterprise metaverse” at a speech at Microsoft Inspire earlier this year.

"With our metaverse stack, you can start with the digital twin to build a rich digital model of anything physical or logical, whether it's assets, products, or complex environments spanning people, places, things and their interactions," Nadella said.

The Microsoft enterprise metaverse combines the internet of things (IoT), digital twins and mixed reality to capture a bigger chunk of the enterprise software market.

“Microsoft Enterprise Services (MES) should be able to maintain its market position as a result of being part of the largest software company in the world,” says Morningstar equity analyst, Dan Romanoff.

The move from on-premises to cloud and/or hybrid environments remains a complex task, he adds, noting that “given the company’s position as a leader in both traditional (Windows Server and SQL products) and cloud (Azure), we believe customers will continue to engage with Microsoft for professional services.”

Prompted by solid revenue growth, Romanoff recently upped the stock’s fair value from $278 to $325, stressing “we continue to see upside to this high-quality name from here.”

Stock: Walt Disney

Price: $184

Fair Value: $170

Star Rating: 3

Economic Moat: Wide

Global entertainment heavyweight Walt Disney (DIS) owns popular characters including Mickey Mouse and Luke Skywalker, featured at several Disney theme parks around the world. The company also makes films under Pixar, Marvel, and Lucasfilm films studios and owns popular TV channels and TV production studios. Disney recently waded into the burgeoning streaming market with its own media offerings ESPN+ and the Disney+ service.

“We believe Disney is successfully transforming its business to deal with the ongoing evolution of the media industry,” says Morningstar equity report, adding that its direct-to-consumer streaming services are becoming leading “drivers of long-term growth as the firm transitions to a streaming future.”

Walt Disney chief technology officer Tilak Mandadi has publicly shared Disney’s long-term vision of building a Disneyland-themed metaverse. “As we look to the future, connected park experiences that transcend the physical and digital barrier and unlock new layers of storytelling are a very exciting focus of ours,” he said at last year’s IAAPA, one of the largest annual theme park industry events. “I call this concept the ‘theme park metaverse’ – this is where physical and digital worlds converge, with wearables, smartphones and digital access points immersing the guests in the metaverse experiences.”

Mandadi disclosed the House of Mouse was working to “bringing more of these experiences to our guests in the months and years to come – in our parks, at our hotels, on our cruise ships and extending into guests’ homes.”

The recent rebound in revenue and strong subscriber growth led Morningstar equity analyst Neil Macker to raise the stock’s fair value from $154 to $170.

 

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