Stocks to buy

Investors are continually searching for the next significant market opportunity to continue augmenting their wealth. Recently, one of the most thrilling trends has been the emergence of the metaverse. This digital realm holds the potential to revolutionize our interactions with technology and with each other. In this context, it is crucial to consider the significance of metaverse stocks.

Over the last year, the valuations of metaverse stocks have been crumbling. The underperformance of these stocks is attributable to factors such as recessions, bank failures, and stagnant stock returns rocking the markets of late.

However, none of these developments relate to the metaverse concept itself. The opportunity remains massive. As reported by Precedence Research, the worldwide metaverse market was valued at $68.49 billion in 2022. It is projected to exceed approximately $1.3 trillion by 2030, experiencing a compound annual growth rate (CAGR) of 44.5% throughout the forecast period from 2022 to 2030.

Patience is essential, as the metaverse may require a decade or more to evolve fully. However, this presents a fantastic opportunity for investors. The metaverse is still not a mature concept, so there is ample time to invest in metaverse-related stocks. Let’s explore investment strategies in this thrilling sector and examine some companies poised to capitalize on this emerging trend.

Meta Platforms (META)

Source: Blue Planet Studio / Shutterstock.com

In October 2021, Facebook’s announcement of changing its corporate name to Meta Platforms (NASDAQ:META) made investors aware of the metaverse’s potential transformational impact. The metaverse envisions creating interconnected virtual environments that integrate living, working, and recreational activities.

Most of the company’s income stems from advertisements on the Facebook and Instagram platforms. However, Meta Platforms also operates a division called Reality Labs, which specializes in selling hardware devices and virtual reality content. Oculus VR headsets have outsold all competitors in the market, solidifying Meta’s position as a leading stock in the immersive hardware industry.

The company is allocating billions of dollars to develop software and content for augmented and virtual reality applications. This investment will allow the company to explore various aspects of the metaverse, which has the potential to transform numerous industries.

However, patience is crucial. The company plans to spend $10 billion annually on the platform. Furthermore, Meta has set aside 20% of its 2023 overall costs to Reality Labs, its metaverse division. Although this segment contributes only 2% of revenue but 18% of operating expenses, Meta is focused on long-term growth. In 2022, Reality Labs generated nearly $2.2 billion in annual revenue, establishing Meta as a major metaverse player worldwide. However, it lost $13.72 billion on the division in 2022.

Some investors remain skeptical about Meta’s investments, which is understandable as the metaverse concept is still in its early stages. While there is undeniable interest in the metaverse, it’s currently experiencing its “iPhone moment,” and Meta Platforms is taking on the challenging task of paving the way in this space.

Roblox (RBLX)

Source: Miguel Lagoa / Shutterstock.com

Roblox (NYSE:RBLX) serves as a popular virtual world, potentially representing an initial phase of a metaverse platform.

A few years back, the platform mainly appealed to U.S. users under 13, but it has since evolved into an international company with a growing base of older users. Although the metaverse is expected to have numerous interactive platform destinations, Roblox’s existing user base, or DAUs, gives it a significant advantage. In February, DAUs clocked in at 67.3 million, up 22% year-over-year.

Historically, Roblox relied on tweens for growth. Although users under 13 still comprised a significant portion of the 58.8 million DAUs in December 2022, the 17-24 age group has been rapidly joining, becoming the fastest-growing demographic with a 31% year-over-year increase, accounting for 22% of all DAUs.

This growth in older users represents a massive opportunity. Older users typically have more disposable income and don’t need parental permission to purchase Robux for premium content. With the 17-24 age group now making up 22% of total bookings, their spending behavior benefits Roblox’s business.

Roblox’s revenue growth is driven by spending behavior. This makes the platform more attractive to investors and ensures long-term financial stability and growth. Roblox’s ability to tap into an older demographic speaks to its adaptability and potential.

Overall, provided that the management shows expense discipline and consistent growth in adjusted EBITDA, the stock has the potential to be a standout among metaverse stocks in the future.

Cloudflare (NET)

Source: IgorGolovniov / Shutterstock.com

While not exclusively a metaverse stock, Cloudflare (NYSE:NET), a prominent edge-based content delivery network (CDN) provider, plays a vital role in developing the infrastructure required for a metaverse.

Edge computing enhances internet speed, reliability, and security. All of these are crucial aspects of the metaverse’s development. Consequently, Cloudflare stands to benefit significantly from this emerging trend.

As mentioned, the metaverse has various requirements. Cloudflare addresses a key one; cybersecurity. The company already provides cybersecurity solutions, thwarting 117 billion daily threats.

Cloudflare’s Q4 revenue grew 42% year-over-year to $274.7 million. This was driven by 134 new high-value customers and a 22% increase in spending from existing clients. The company also achieved record operating income ($78.1 million, 28% margin) and free cash flow ($33.7 million, 12% margin) due to this growth and improved net-revenue retention.

Cloudflare’s price-to-sales ratio has ranged from 11.56 to 110.61 over the past decade, with a median of 26.3. The shares sell at 19 times the price-to-sales, making it not a bargain. Nonetheless, given its promising long-term prospects, I suggest adding this name to your portfolio during price drops.

On the publication date, Faizan Farooque did not hold (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.

Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.

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