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2 Top Metaverse Stocks to Buy and Hold for the Next 10 Years

The world is abuzz about the metaverse, an evolving technology that could reshape life as we know it. While somewhat nebulous, the term is straight out of science fiction. It describes a network of immersive virtual worlds that blend elements of social media, gaming, entertainment, and commerce, effectively creating a brand new economy.

In fact, a recent Bloomberg report called the metaverse the "next big technology platform," and it put the market opportunity at $800 billion by 2024. But Morgan Stanley analyst Brian Nowak believes that figure could be as high as $8 trillion. Suffice it to say, this could be a tremendous opportunity for investors.

With that in mind, Unity Software (NYSE: U) and Cloudflare (NYSE: NET) should both benefit as the metaverse continues to evolve. Here's why.

Image source: Getty Images.

Unity Software: The development engine

Unity is the leading platform for creating interactive, real-time 3D applications. Its software development engine has a suite of tools for animation, lighting, sound, and more, allowing clients to render physically accurate and immersive content -- the type of content that will bring the metaverse to life. And unlike traditional development solutions, Unity allows clients to deploy applications across more than 20 different platforms (including iOS and Android) without any recoding.

Unity also offers a suite of tools that help developers monetize content and optimize user engagement, including products for in-app purchases, digital advertising, and user analytics. That end-to-end approach has made its platform popular in a number of different industries, including architecture, film, and retail. But Unity has truly distinguished itself in the gaming industry. In 2020, 71% of the top 1,000 mobile games were created on Unity's platform, up from 53% in 2019. And 94 of the top 100 game development studios were Unity customers.

Not surprisingly, the company is growing its top line quickly.

Metric

Q3 2020

Q3 2021

Change

Revenue (TTM)

$710.2 million

$1.0 billion

43%

Data source: YCharts. TTM = trailing-12-months.

Investors should note that Unity is still unprofitable based on GAAP metrics, but the company generated positive free cash flow of $34 million in the third quarter. Moreover, Unity posted a net expansion rate of 142%, meaning the average customer spent 42% more over the past year. In other words, clients are becoming increasingly dependent on its platform. That bodes well for the future.

On that note, management puts its addressable market at $29 billion, citing untapped opportunities in both gaming and other industries. And long-term, the evolution of the metaverse should be a significant catalyst for Unity. That's why this growth stock looks like a smart way to invest in that multi-trillion-dollar market.

Cloudflare: The cloud infrastructure

Cloudflare specializes in cloud computing. Its platform includes a range of services that help clients accelerate and secure business-critical resources, including corporate networks, software, and websites. And because those services are delivered from the cloud, clients avoid the cost and complexity of managing on-premise network infrastructure.

In the future, every aspect of the metaverse -- from virtual scenery and avatars to digital assets and activities -- will be defined by software, and that content will need to be fast, safe, and reliable to keep users engaged. Fortunately, that's what Cloudflare does best. In fact, its content delivery network already powers more than 19% of the internet, while Fastly ranks second with less than 2% market share.

Additionally, Cloudflare's infrastructure agnostic strategy differentiates it from tech titans like Microsoft and Amazon. Specifically, its platform accelerates and secures resources across private data centers, public clouds, and multi-cloud environments, giving clients a single layer of visibility across their IT ecosystem. Tech titans can't offer that convenience.

Financially, Cloudflare has posted impressive results on a consistent basis. During the most recent quarter, the company grew its customer base 31% to over 132,000, and the average customer spent 24% more in the last 12 months. Not surprisingly, revenue is growing quickly. And while Cloudflare remains unprofitable on a GAAP basis, management anticipates reaching breakeven by the first quarter of 2022.

Metric

Q3 2020

Q3 2021

Change

Revenue (TTM)

$389.1 million

$588.8 million

51%

Data source: YCharts. TTM = trailing-12-months.

Currently, management puts its addressable market at $86 billion, but that figure should rise as Cloudflare continues to grow its portfolio. And with tailwinds like digital transformation, remote work, and the metaverse at its back, the company is well-positioned to gain momentum in the coming years. That's why this stock could make shareholders richer in the long run.

Find out why Unity Software Inc. is one of the 10 best stocks to buy now

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Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Trevor Jennewine owns Amazon and Fastly. The Motley Fool owns and recommends Amazon, Cloudflare, Inc., Fastly, Microsoft, and Unity Software Inc. The Motley Fool has a disclosure policy.


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